December 28, 2011
A Holiday Gift for Charter Communications. And Northlake Clients.
Just before Christmas Santa delivered gold for shareholders of Charter Communications (CHTR). Santa made a first stop at Cablevision (CVC) headquarters, leavng coal, when it was announced that Tom Rutledge was abruptly leaving his role as #1 operating executive at CVC. Rutledge is the most highly regarded executive in the cable industry, a role that was magnified at CVC due to the volatile decision-making of the controlling shareholders, the Dolan family. In addition, CVC arguably faces the toughest competitive environment among major cable companies as it goes head-to-head with Verizon's FiOS in its NYC metropolitan area markets. CVC fought off Verizon successfully for many years despite street fears and the company produced industry leading financial and subscriber results cementing Rutledge's stellar reputation.
The specific reason behind Rutledge's abrupt departure from CVC remains a mystery but that does not matter to CHTR. CHTR is a good landing spot for Rutledge as its current CEO was already planning to leave in February. CHTR has recently largely completed its capital spending program to upgrade its infrastructure. Major products like broadband, phone, and digital cable are underpenetrated in CHTR's systems. CHTR faces less competition with barely any FiOS overlap and AT&T's U-Verse at 30% of subs. Satellite is CHTR's primary competitor but service providers lack a broadband offering, which is increasingly the premier product in cable's bundle.
CHTR shares trade at a slight premium to its cable peers. However, the company has the potential to produce the fastest organic growth in cable in revenue, EBITDA, and free cash flow. Overall, CHTR's investment profile is excellent. The primary risk is that the new CEO brings expectations down to lower his own bar and/or pursues acquistions rather than using free cash flow to deleverage, buy back shares, or pay dividends. CHTR is also heavily leveraged but free cash flow should handle the debt load comfortably over the next several years.
I like the CHTR story. If CHTR is able to hit current 2012 estimates, I think the shares can trade to $65-70 in 2012, up 20-30% from current prices. In the short-term, I think the shares can continue to rise as sentiment and sponsorship among analysts and investors toward the shares improves thanks to the arrival of Rutledge.
Disclosure: CHTR is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CVC and CHTR are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.
Posted by Steve Birenberg at December 28, 2011 09:38 AM in CHTR