John Malone has returned to the cable industry. Should investors follow him into his newest investment at its current price? Let’s dig deeper to find out.
Malone’s firm, Liberty Media Corp (NASDAQ:LMCA), has bought a 27.3% stake in Charter Communications, Inc. (NASDAQ:CHTR), one of the largest providers of cable service in the U.S. At around $95.50 per share, the deal has a total transaction value of around $2.62 billion.
Since the middle of 2012, Charter Communications, Inc. (NASDAQ:CHTR) shares have advanced significantly, from $68.70 per share to more than $102 per share.
Get to know Charter
Charter Communications, Inc. (NASDAQ:CHTR) is considered one of the biggest cable service providers in the U.S, serving around 5.4 million residential and commercial customers, with 62% of the company’s customers subscribing to a bundle of two or more services.
As of December 2012, Charter Communications had around 4 million residential video customers, 3.8 million residential Internet customers and 1.9 million residential telephone service customers.
The majority of its revenue, $3.64 billion, or 48.5% of its total 2012 revenue, was generated from the video segment. The Internet segment ranked second, with nearly $1.87 billion in revenue in 2012, while the telephone segment contributed around $828 million in revenue.
In 2012, the company experienced a growth in average video revenue per user, from $72 to $74. Its average Internet revenue stayed steady at $42, while average telephone revenue dropped from $41 to $37.
Free from bankruptcy, but still in debt
Charter filed for bankruptcy in March 2009 because of its huge debt burden of around $22 billion. Throughout the bankruptcy process, the company has significantly reduced its debt by more than $9 billion.
However, Charter Communications, Inc. (NASDAQ:CHTR) is still extremely leveraged. As of December 2012, it had $12.8 billion in long-term debt, but only nearly $150 million in total stockholders’ equity. Its deferred tax liabilities, which could be considered an interest-free loan from the government, were more than $1.1 billion.
In 2010, Charter Communications, Inc. (NASDAQ:CHTR)’ operating income began to improve. However, its high interest expense has eaten away its profits. In 2012, it made $916 million in operating income, but still booked a net loss of $304 million, or $3.05 per share.
High valuation, zero dividend
At around $102 per share, Charter Communications is worth more than $10.3 billion. The market values the company at 8.78 times EV/EBITDA.
Compared to its peers, including Comcast Corporation (NASDAQ:CMCSA) and Cablevision Systems Corporation (NYSE:CVC), Charter Communications carries the most expensive valuation. Comcast is trading around $40 per share, with a total market cap of $105.5 billion. It has the cheapest valuation at only 6.78 times EV/EBITDA. Cablevision, at $15 per share, has a total market cap of nearly $4 billion. The market values Cablevision at 7.6 times EV/EBITDA.
Interestingly, Comcast is the most profitable company among the three, with around a 19.5% operating margin, whereas the operating margin of Cablevision is 12.7%. Charter Communications, Inc. (NASDAQ:CHTR) has the smallest operating margin at 12.4%.
That said, I’m impressed by Charter’s chief. Former Cablevision CEO Tom Rutledge has headed Charter since late 2011. He was the man behind Charter’s recent purchase of Cablevision’s cable systems in the western states for $1.62 billion. With the deal, Charter will own some of the fastest-growing cable assets in the U.S.
In terms of dividend yield, Cablevision pays the highest yield at 4.1%, while Comcast’s dividend is only 1.9%. Charter Communications, Inc. (NASDAQ:CHTR) does not pay any dividends at the moment.
My Foolish take
Charter Communications, Inc. (NASDAQ:CHTR) will head toward brighter prospects under the leadership of Tom Rutledge. However, I would rather wait for more debt reduction to feel more comfortable initiating a long position in the company. In the meantime, Comcast is a good long-term play with the highest margin and lowest valuation.
The article Is John Malone’s Return to Cable a Bullish Sign? originally appeared on Fool.com and is written by Anh Hoang.
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