Shares of Charter Communications (CHTR +0.28%), the cable and internet company behind Spectrum Internet, tumbled 15.7% through 12:45 p.m. ET on Friday after the company reported a big miss on its fourth-quarter earnings this morning.
Heading into the quarter, analysts had forecast Charter would earn $8.68 per share on sales of $13.7 billion. Charter nailed the sales estimate, but missed badly on earnings, reporting a profit of only $7.07 per share.
NASDAQ: CHTR
Key Data Points
Charter Q4 sales and earnings
Charter reported a 61,000-customer decrease in residential and small and medium-sized business internet customers in the quarter, but offset those sales by adding 546,000 mobile phone customers. Ultimately, sales held relatively stable at $13.7 billion. Adding the mobile customers helped a lot with that. Mobile phone revenue grew 36%. Higher prices on internet service also helped to offset customer losses, with revenue there rising 3%.
Profits still declined 11%, however, and free cash flow at the company fell 7%.
For the year, total revenue rose 1% to $56.4 billion in annual revenue. Net income, however, fell 10% to $4.6 billion, and free cash flow plummeted 43% to just $3.5 billion.
Is Charter Communications stock a sell?
That all sounds pretty bad, and Charter Communications management declined to give guidance that might lend hope that things will improve in 2024. But based on its trailing results, here's how the stock looks to me, today.
Valued at $47.7 billion, and with $4.6 billion in trailing profits, Charter stock seems attractive at a P/E ratio of only 10.4 -- especially with profits growth predicted to average nearly 12% annually over the next five years. However, there are caveats to this observation.
For one thing, real free cash flow ($3.5 billion) isn't quite as strong as reported net income ($4.6 billion), indicating low quality of earnings at Charter. Valued on free cash flow, the stock costs 13.6 times free cash flow, which is a bit pricey relative to projected growth -- especially with Charter paying no dividend, which is unusual in a big telecom stock.
A potential investor in Charter also needs to be aware of the debt picture. Charter carries $97 billion in debt (net of cash), so its enterprise value is actually about 3 times as large as its apparent market capitalization -- $144.7 billion to be precise. Valued as an enterprise, therefore, Charter costs a whopping 41.3 times trailing free cash flow. And not to beat a dead horse or anything, but that's a lot of money to pay for a telecom company -- with or without a dividend and with or without a bit of growth behind it. By way of comparison, a more successful business like Verizon Communications sells for an EV/FCF ratio of less than 19, and AT&T costs only 13.5x FCF -- both with big 6%-plus dividend yields to boot.
If I were in the market for a telco stock, I'd buy either of those before I'd even glance in Charter Communications' direction.
