Given the headwinds that abound from the ongoing coronavirus pandemic, investors should consider adding stocks of companies that appear to be able to thrive in this environment.
While there are companies producing robust growth, investors also need to monitor valuation prior to making a purchase.
A great example of this would be Charter Communications, Inc. (CHTR), a major holding for institutional investors such as Slate Path Capital. The company has posted excellent quarter results recently, but is this enough to make up for the stock’s incredibly rich valuation?
Business Overview and Recent Earnings Results
Charter Communications is the second largest cable service provider in the U.S. The company has 16 million subscribers spread out over more than 40 states. Charter Communications also provides high-speed internet and voice services. It is estimated that Charter Communications controls approximately two-thirds of the market for Internet access in the country. The company also sells local cable advertising. Charter Communications has a market capitalization in excess of $128 billion.
Charter Communications reported third quarter earnings results on 10/30/2020. Revenue increased 5.1% to $12 billion, which was $1.6 million higher than expected. The company’s’ third quarter GAAP earnings-per-share of $3.90 was a 126% increase year-over-year and $0.99 above estimates.
While stock repurchases have removed almost a quarter of the share count over the past three years alone, Charter Communications continues to see excellent bottom-line growth. Net income was up 110% to $814 in the third quarter. This shows that the company isn’t using stock buybacks to prop up EPS results. Growth has been natural as the company attracts more customers to its business.
Total residential, small and medium business customer relationships increased 47% to 457K compared to the third quarter of 2019. Total customer relationships are higher by 6.8% over the last year.
Internet customers growth was also impressive, with total additions higher by 41% to 537K. Over the last year, total internet customers have climbed almost 9% to 28.6 million.
Residential video subscribers increased by 53K in the quarter, compared to a decline of 77K in the previous year. The company has nearly 16 million residential video subscribers.
Charter Communications’ mobile lines were up 87K, or 31.5%, to 363K from last year. The company now has more than 2 million total mobile lines.
Total debt has increased more than 26% to $77.95 billion since 2016, which is something investors will want to watch carefully, but just $3.5 billion of that debt is due within the next year. Charter Communications ended the most recent quarter with $1.3 billion off cash and equivalents on its balance sheet.
Charter Communications has proven itself to be very pandemic proof. In all probability, the company is also fairly recession proof as internet and TV access would likely be prioritized in an economic downturn given consumer demand for these services.
According to Yahoo Finance, consensus estimates for Charter Communications call for $14.15 of earnings-per-share for the year. This would be a 90% increase from the previous year.
Growth Potential and Valuation
While Charter Communications is already a dominate player in its industry, there remains room for growth.
Slightly more than half of households within the company’s markets currently subscribe to at least one of its service offerings. This leaves the company with almost 24 million more potential customers. Higher rates of home construction in certain key markets, such as Florida, North Carolina and South Carolina, have added additional households within reach of the Charter Communications’ operations.
Shares of Charter Communications have railed more than 32% year-to-date, easily besting the 11% return for the S&P 500.
This has caused a spike in the stock’s valuation. Using the 11/16/2020 closing price of $641.41 and expected earnings-per-share for 2020, Charter Communications has a price-to-earnings ratio of 45.3.
It is difficult to compare the stock’s current valuation to its historical average as earnings-per-share only turned positive in recent years. Even if comparison was possible, reasonable investors can agree that a price-to-earnings ratio above 45 is very expensive.
Charter Communications has performed remarkably well this year, both in terms of company and stock performance. The company is a juggernaut in its industry, but also has additional room for growth.
That said, the stock is incredibly expensive. And while the company does repurchase a lot of stock, $3.6 billion alone in the third quarter, it does not pay a dividend, which could soften the blow of a multiple reversion.
While we like the company’s business and growth potential, we believe that investors holding the stock should consider taking some profits in Charter Communications.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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