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Charter Communications: A Good Time to Buy?

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The fourth-largest cable operator in the U.S., Charter Communications  (NASDAQ: CHTR  )  has been improving its revenues, subscriber base, and cash flow. Charter saw its highly publicized bid for Time Warner Cable  (NYSE: TWC  )  bogged down and toppled by Comcast. And in an effort to grow its business and drive operational efficiencies, Charter will try to acquire subscribers from Time Warner Cable. 

Moving in the right direction
Charter has more than 5.9 million residential and commercial subscribers. It offers bundled services to these consumers, and 62% of them have a subscription bundle. In its latest 10K, the company stated that its top-line sales growth was coming mainly from triple-play homes. The company also provides more than 567,000 commercial businesses with tailored and scalable solutions. However, roughly 84% of Charter's total revenue comes from residential users.

The company's video subscriber count stood at 4.2 million as of year-end 2013, and its residential Internet subscribers stood at 4.4 million. As more users are opting for mobile phone usage, the company's residential telephone customer count stood at 2.3 million at the end of 2013. Charter's revenue per customer relationship increased to $108.06 in 2013, up from $105.55 in 2012; this is a great sign for any subscription business. 

Charter has been trying to accelerate its revenue growth, as many cable operators have seen their video subscribers shrink recently. Charter has been generating positive operating income in the last two years, but its debt load has led to high interest expenses. These expenses led to the company reporting negative earnings per share in both 2012 and 2013. However, the operating cash flow of the company increased 15% year over year to $2.16 billion, which is a strong positive for the company. 

Acquire cable assets
John Malone's Liberty Media  (NASDAQ: LMCA  )  holds a sizable stake of 26% in Charter and yields significant influence on Charter's management and board. Just recently, Liberty Media decided to break up its stock into two parts -- Liberty Media and Liberty Broadband Group.

On top of that, Liberty Broadband Group, which will include stakes in Charter, Time Warner Cable, and True Nation, will be raising more cash through the offering of subscription rights to shareholders at a discount. This new cash will be used to acquire cable subscribers.

Since programming is the largest operating expense item for most cable providers, including Charter, the rise in programming costs has negatively affected the fundamentals of many cable providers. Merging of cable companies or assets will help the companies involved to realize operational efficiencies and drive EPS growth.

After the acquisition of Time Warner Cable, Comcast has stated that it has plans to divest 3 million subscribers and bring the combined subscriber base of Comcast and Time Warner Cable to roughly 30 million; this represents 30% of the pay-TV market in the U.S. If regulators approve the 2.875:1 all-stock bid for Time Warner Cable from Comcast, the combined entity will have immense power at negotiation tables. However, the cable companies operate in different zip codes and thus competitive forces will not impact Charter. 

If Charter can acquire cable subscribers in attractive territories at a good price, the company will benefit immensely. Liberty Media splitting its stock and raising additional cash is a good sign for Charter as well because Liberty will very likely inject new cash into Charter to aid the acquisition of cable assets. Liberty Media has agreed not to increase its investment in Charter above 35% until January 2016, but its current ownership is well below that amount. This means that Liberty will likely put new money in the form of debt or equity into Charter for growing its subscriber base.

Going forward
Charter is highly likely to be active in M&A in the near term. The company's growth in operating cash flow and subscribers -- both residential and commercial -- are strong positives. Charter's stock price took a hit after it failed to acquire Time Warner Cable, but the company has a lot more going for it. The drop in the company's stock price represents a good buying opportunity for longer-term investors.

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