Standing out among the Street's worst performers today is Charter Communications, a cable television company whose shares slumped -8.7% to a price of $364.4, 22.96% below its average analyst target price of $473.0.
The average analyst rating for the stock is hold. CHTR lagged the S&P 500 index by -9.0% so far today and by -19.0% over the last year, returning -2.0%.
Charter Communications, Inc. operates as a broadband connectivity and cable operator company serving residential and commercial customers in the United States. The company is in the communication services sector, which includes primarily companies with a cyclical profile whose share price is correlated with macro economic cycles. The exception is large telecom companies, which are more defensive in nature since their share prices have a looser correlation with recessions.
Charter Communications's trailing 12 month P/E ratio is 11.9, based on its trailing EPS of $30.62. The company has a forward P/E ratio of 9.7 according to its forward EPS of $37.42 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the telecommunications sector has an average P/E ratio of 23.78, and the average for the S&P 500 is 15.97.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
Charter Communications's PEG ratio of 1.14 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on CHTR's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 54,570,000 | 42,238,000 | 23 | 4.55 |
| 2022 | 54,022,000 | 42,060,000 | 22 | 10.0 |
| 2021 | 51,682,000 | 41,156,000 | 20 | 17.65 |
| 2020 | 48,097,000 | 39,692,000 | 17 | 21.43 |
| 2019 | 45,764,000 | 39,253,000 | 14 | 16.67 |
| 2018 | 43,634,000 | 38,413,000 | 12 |
- Average gross margin: 18.0 %
- Average gross margin growth rate: 11.1 %
- Coefficient of variability (higher numbers indicating more instability): 37.4 %
We can see from the above that Charter Communications business is not strong and its stock is likely not suitable for conservative investors.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Charter Communications was $3.19 Billion as of its last annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In CHTR's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $5.28 Billion and they've been growing at an average rate of 3.2%.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Charter communications's P/B ratio is 4.86 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Telecommunications sector, which stands at 3.46 as of the first quarter of 2023.
Charter Communications is likely overvalued at today's prices because it has a very low P/E ratio, an elevated P/B ratio, and irregular cash flows with a flat trend. The stock has mixed growth prospects because of its average net margins with a positive growth rate, and no PEG ratio. We hope this preliminary analysis will encourage you to do your own research into CHTR's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
