Why Charter Could Have Most Upside of All Cable Stocks

Charter Communications Inc. (NASDAQ: CHTR), a leading broadband communications company, is the fourth-largest cable operator in the United States. Considering recent acquisitions and the market climate, this company could stand to make an effective run into 2017. As a result, one key analyst released a recent report about Charter noting it as having the most upside potential out of all the cable stocks.

Merrill Lynch initiated coverage on Charter with a Buy rating and a price objective of $300, which represents 27% upside potential. The firm believes that the recent transactions should boost Charter’s scale and allow it to capture additional HSD, business services and video share. With its acquisitions of Time Warner Cable and Bright House Networks complete, Charter is the largest pure-play cable operator and the second largest broadband provider in the country.

The firm’s estimates indicate that Charter will generate $8.8 billion, or $52 per share, in free cash flow (FCF) in 2020, enabling significant capital returns. Merrill Lynch estimates that by 2020, Charter will have repurchased roughly 45% of its market cap. Also the firm estimates four-year compound annual growth rates (CAGRs) of 6%, 8%, 22% and 41% for revenue, EBITDA, FCF and FCF/share, respectively.

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In Merrill Lynch’s view, Charter will take its operating expertise to its new, wider footprint and drive:

• Increased broadband penetration–we estimate a rise to 54% by 2020 estimates (vs 44% at 2015) with each 1% increase amounting to about $150 million in EBITDA.
• Commercial growth with every 100 basis points of penetration= about $250 million in EBITDA (2016 estimated penetration of 14%).
• Accelerate utilization of Charter’s net operating losses (NOLs) thereby increasing the value of its tax attributes.

Accordingly, the firm gave its investment rationale as follows:

Charter will benefit from: (1) bringing its operational strategy to a large base of assets, (2) facilitating growth in Business Services (particularly in midsized/ enterprise), (3) creating sizable opex synergies ($800mn realized within first three years), in addition to future revenue synergies, (4) accelerating the utilization of Charter’s NOLs ($11.3bn) and (5) driving robust capital returns through increased FCF generation.

Shares of Charter were trading at $236.00 on Tuesday. The stock has a consensus analyst price target of $273.97 and a 52-week trading range of $156.13 to $244.51.

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