At first glance Charter Communications (NASDAQ:CHTR) seems like it would be a boring stock. As the second-largest cable company in the country, Charter sells basic internet, video, and phone services to millions of Americans. Unlike rival Comcast (NASDAQ:CMCSA), the company doesn't own a lot of proprietary content assets or theme parks.
Yet after Charter reported its Q4 2018 results, shares are up roughly 16% -- an unheard of movement for a quiet cable services company. What's behind the recent rise, and can Charter continue to post big gains?
Charter's killer Bs: broadband and businesses
Part of the reason Charter gained so much after earnings is that it had sold off so much over the course of 2018. Last year, the stock fell about 15%.
The company was plagued by fears over cord-cutting, as many U.S. customers are increasingly eschewing the expensive cable bundle for over-the-top streaming options. Over the course of 2018, Charter shed some 300,000 residential video subscribers, or 1.8% of its customer base, and legacy landline voice products declined an even greater 2.8%.
However, Charter still increased its total residential PSUs (primary service units) by 1.1% in 2018 on the back of strong 4.9% internet growth. Meanwhile, Charter's small and medium business segment grew PSUs a strong 11.8%, and enterprise customers grew an even stronger 13%. Total customer relationships grew 3.5% across the entire Charter footprint.
That, combined with modest residential video price hikes, allowed fourth-quarter revenue to grow 5.9% to $11.23 billion, beating analyst expectations by roughly $100 million.
Apparently, the better-than-expected customer relationship and revenue growth was enough to calm investor fears over cord-cutting.
Check out the latest Charter earnings call transcript.
Mobile could be a future catalyst
While Charter's landline voice service may be declining, its new Spectrum Mobile service, unveiled last summer (which leases capacity from Verizon's (NYSE:VZ) network), should help counter that decline. Mobile revenue came in at only $89 million last quarter, and the segment still posts losses. Still, the product is only a few months old and is just beginning to ramp up. In Q4, Charter added 113,000 mobile customers, with an increasing portion of new cable customers opting for the bundled mobile offering.
Charter might only be scratching the surface of the mobile opportunity -- the company only began allowing customers to switch existing devices over to Spectrum's service in stores in December. And on the conference call with analysts, management said Charter would soon allow customers to self-serve, or switch service providers without even having to visit a physical store.
Management had previously guided to a break-even Mobile customer count at around 2 million. They're currently a far cry from that figure, but for context Charter had 23.6 million internet relationships and over 50 million "passings" (potential customers connected to Charter's footprint) at the end of 2018. So the mobile opportunity seems attainable over time, and management said it fully expects mobile to be profitable on its own one day, even without the "bundling" benefit to cable and internet.
Capex to come down...waaaaaay down
Finally, the element perhaps most responsible for Charter's stock surge was management's commentary around capital expenditures for the upcoming year. Since Charter purchased both Time Warner Cable and Bright House Networks in 2016, it's spent heavily in unifying all three companies' various systems and upgrading the combined cable footprint to the DOCSIS 3.1 digital standard, which significantly boosts internet speeds and video capability. These integration projects all took money, and lots of it, over the course of both 2017 and 2018. However, management said the integration phase had largely been completed last quarter.
For 2019, management guided to a huge capex decrease, from $9.1 billion last year to just $7 billion, sending an extra $2 billion basically straight to Charter's bottom line. When asked about the possibility of capex coming down even further in 2020 and beyond, CEO Tom Rutledge didn't confirm, but he expressed confidence that capital intensity -- or capex as a percentage of revenue -- should continue to decrease, even if the overall number doesn't decrease.
In other words, Charter is now transitioning away from its acquisition-and-integration phase -- which took about three years -- and into harvest mode, where investors will begin to see the company's "true" profitability and cash flow potential.
Apparently, investors like what they've seen with Charter's turnaround. With costs coming down and the company growing its top line, it's easy to see why.