Shares of Charter Communications (CHTR 0.25%) fell by about 7.2% Friday. The broadband, cable, and now mobile service provider released its first-quarter earnings before the opening bell, and actually beat expectations on profits and delivered revenue that was in line with them.
So why did the stock fall so much? Well, the Nasdaq Composite was down 4.2% on Friday after other tech sector players delivered disappointing reports after the closing bell Thursday, and the S&P 500 fell by 3.6%. With investors broadly in a nervous mood, and feeling particularly skeptical about technology and the highly competitive telecom market, Charter's numbers weren't good enough to put them at ease.
In Q1, Charter delivered 5.4% revenue growth and 5.4% adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) growth, in line with estimates. Its earnings per share of $6.90 actually beat the consensus estimate, but many investors who follow this stock don't really focus on net income.
Rather, they prefer to look at cash flow in the telecom business, as well as underlying drivers such as customer additions and broadband subscriber growth. During the first quarter, both of those metrics came up a little short. Charter saw 3.7% residential revenue growth, lower than the company's overall growth. The residential segment provided more than $10 billion of the company's $13.2 billion in revenue, so that wasn't great. Also of concern, Charter's net customer count grew by just 129,000, a considerable deceleration from the 302,000 net customers it added a year ago.
Moreover, free cash flow fell slightly to $1.8 billion, although that decline was entirely due to a one-time $220 million payment for a legal settlement. Otherwise, free cash flow would have grown by 8.9%, outpacing revenue growth.
Addressing concerns over slowing broadband subscriber growth, Chief Operating Officer Chris Winfrey said during the Q1 earnings call that "transaction volume in the market, it remains low, particularly mover churn, which is a key source of net subscriber acquisition for us... Our churn rates of all kinds and across all footprint types remains at record lows."
So on the positive side, Charter isn't churning customers, and it's still growing. Basically, it appears most people are pretty satisfied with their service and aren't switching providers as much these days. That could hamper industry growth, but on the other hand, it seems to reinforce the safety of Charter's customer base.
It might be hard to believe that an "unexciting" telecom with defensive characteristics and low churn would be down nearly 50% from its 2021 high, but it's true. One reason could be that Charter is highly levered, carrying $95 billion in debt with an average interest rate of 4.6%. Furthermore, Charter increased its debt load last quarter, as it generally does with growing EBITDA, in order to repurchase stock. The company bought back a whopping $3.6 billion worth of shares last quarter, even though it only generated free cash flow of $1.8 billion, using high-yield debt to make up the difference. Since September 2016, Charter has repurchased nearly 42% of its shares outstanding.
That could definitely enhance equity returns over the long-term; however, it also increases risks as interest rates go up. Charter looks awfully cheap at these levels, at around 10 times its run-rate cash flow, adjusting for the legal settlement. However, given the market's general skepticism about the economy, rising interest rates, and non-dividend paying stocks, it's unclear what could make Charter's share price start moving higher again. Likely, it would take the Federal Reserve reversing course on its plan to steadily boost benchmark interest rates.