One way to incorporate the views of hedge fund managers and other successful investors is by looking at 13F filings, either from an individual fund that has proven to be a strong performer or by pooling filings from a number of funds to look for a consensus view. For example, we have noticed that the most popular small cap stocks among hedge funds tend to outperform the market; the stocks in this category which we listed in our August newsletter produced an excess return of 18 percentage points between September and January (read more about our hedge fund strategies).
However, 13F filings are only released several weeks after the end of a quarter; more up-to-date information on hedge fund activities can be found by looking at 13D and 13G filings. Billionaire Stephen Mandel’s Lone Pine Capital recently disclosed ownership of 7.2 million shares of Charter Communications, Inc. (NASDAQ:CHTR) giving the fund 7.1% of the total shares outstanding. Our records show that Lone Pine had initiated a position in the company during Q3 2012 and owned about 330,000 shares at the end of September. See more of Mandel’s stock picks. Mandel is a Tiger Cub, having previously worked for legendary investor Julian Robertson at Tiger Management.
The TV, Internet, and phone company’s revenue increased 4% in the third quarter of 2012 compared to the same period in 2011. However, higher operating expenses resulted in Charter recording a roughly equal net loss as in Q3 of the previous year. This performance seems consistent with how Charter Communications, Inc. had done in the first half of 2012. Cash flow from operations was $1.4 billion in the first nine months of 2012, but nearly all of that cash was used on capital expenditures. At a market capitalization of almost $8 billion, Charter trades at high multiples on its earnings but in terms of cash flow it looks somewhat more reasonable priced at an EV/EBITDA multiple of 7.8x. It may be worth noting that Charter’s business has little dependence on the broader economy; in turn, movements in its stock price have a weak correlation with those of market indices as shown by the beta of 0.3.
How does Charter measure up against its peers?
We can compare Charter to Comcast Corporation (NASDAQ:CMCSA), Verizon Communications Inc. (NYSE:VZ), Virgin Media Inc. (NASDAQ:VMED), and DISH Network Corp. (NASDAQ:DISH). All of these companies are valued at lower EBITDA multiples than Charter is (and generally are cheaper on an earnings basis as well). Virgin’s EV/EBITDA multiple if 7.5x, with the other three companies carrying enterprise values of less than 7 times their trailing EBITDA. Charter is well within the range formed by these companies when we look at recent revenue performance- Dish Network’s revenue was actually down in its most recent quarterly report versus a year earlier- but Comcast, certainly a very close peer, boasts not only the cheaper valuation we’ve discussed but also a double-digit percentage growth rate on the top line in the third quarter of 2012 from its levels in the same period in 2011. Comcast, of course, is also a much larger company with a market cap of about $100 billion.
As such we’re not sure why Lone Pine is so excited about Charter. Valuing it or similar companies from a P/E perspective is difficult, but even in terms of EBITDA the valuation appears if anything expensive relative to its peers. Charter does not make up for this pricing with superior business performance, and so we would suggest that investors who are interested in the industry look at other companies.
Disclosure: I own no shares of any stocks mentioned in this article.
