Chtr - Zacks Investment Research



|Charter Communications, Inc. |(CHTR-NASDAQ) |$1.60 |

Note to Reader: This report contains substantially new material. Subsequent editions will have new or revised material highlighted.

Overview

Based in St. Louis, Charter Communications, Inc. is a broadband communications company operating in the United States, with approximately 6.22 million customers as of year end December 31, 2004. Through its broadband network of coaxial and fiber-optic cable, the Company offers its customers traditional cable video programming, consisting of analog and digital video service, high-speed cable Internet access (high-speed data service), advanced broadband cable services, such as video-on-demand (VOD), high-definition television service and interactive television, and, in some of its markets, telephone service (telephony). On December 31, 2004, the company served approximately 5.99 million analog video customers, of which approximately 2.67 million were also digital video customers. It also served approximately 1.88 million high-speed data customers. The Company also provided telephony service to approximately 45,400 customers as of that date. Its website is .

Company posted mixed 4Q results that include in-line financial metrics but weak subscriber metrics. Revenues were $1.276 billion, beating consensus estimates of around $1.260 billion. On the other hand, its subscriber metrics suffered from promotional roll-offs and reduced marketing efforts. CHTR lost 83,100 and 14,200 customers from Analog and Video segments respectively, which was offset by a gain of 64,500 and 5,200 customers in its High Speed Data and Telephony segments respectively. Its EBIDTA was $512 MM. Operating costs were $764 million, an 8% increase on y-o-y basis. The rise in operating costs and expenses were primarily due to an increase in programming costs and in service costs from ongoing infrastructure maintenance. The company has not provided formal full-year guidance but expects approximately $1 billion in capital expenditure in 2005.

Analysts have identified the following issues as critical to an evaluation of the investment merits of CHTR:

|Strengths/Opportunities |Weaknesses/Threats |

|1) Higher revenues-- Company delivered higher revenues $1.276 billion, |1) Limited Financial Flexibility- Analysts remain concerned about CHTR’s |

|up 5% on y-o-y basis mainly due to high growth in its High Speed Data and |limited financial flexibility, rising competition and an ongoing SEC/DOJ |

|in Commercial and Advertisement revenues. |investigation that has already resulted in one restatement. The company |

| |is burdened by a daunting capital structure with a massive debt load. |

|2) Intrinsic Value of Cable Systems- Many believe the intrinsic value of |2) Rising Competitive Threats- Strong competition for DBS operators in |

|the company’s cable systems outweigh current valuation estimates and |many of Charter’s rural markets is expected to continue. |

|expect the shares to respond when the market once again revisits higher | |

|cable valuations. | |

|3) Broadband Trends- The industry continues to benefit from the widespread|3) Weak subscriber metrics- CHTR reported weak subscriber metrics. It lost|

|adoption of high-speed broadband Internet access. |83,100 customers in Analog and 14,200 in Video segment. |

Sales

Detailed summaries of quarterly and annual analyst sales, margin and earnings estimates are provided in an accompanying excel spreadsheet.

[pic]

In the fourth fiscal quarter, CHTR reported revenues of $1.276 billion versus $1.217 billion in the same period last year, a 5% increase on y-o-y basis. The increase in revenue is principally due to the growth in its High Speed Data segment (HSD) as well as increased commercial revenues and advertising sales. Segment-wise, HSD revenues increased $53 million or 35%, on a pro forma basis, reflecting 356,600 additional HSD customers since year end 2003. Commercial revenues increased $12 million, or 24%, on a pro forma basis and advertising sales revenues increased $11 million, or 15%, on a y-o-y basis. Video revenues increased 2% on a pro forma basis.

Margin

[pic]

In the 4Q, CHTR reported operating income of $108 million while the net loss applicable to stock was $340 million. Its adjusted EBIDTA totaled $512 million, an increase of $28 million, or 6%, on an actual basis, compared to the year ago period. A reduction in marketing spending as well as lower-than- expected programming cost growth led to higher EBITDA.

Earnings Per Share

[pic]

In the fourth quarter, company reported EPS of -$1.12 versus -$0.20 posted for the same period last year.

Analyst (Smith Barney) lowered 2005 and 2006 EPS estimates to -$2.48 and -$2.34 respectively mainly due to below the line items, partially offset by an increase in share count.

Target Price/Valuation

Of the 13 analysts in our Digest survey, 8 gave a Neutral rating while 5 gave a Negative rating. There was no Positive rating on the stock.

Target price given by analysts ranges from $1 (CSFB) to $2.78 (Oppenheimer). The Digest average target price is $2. Five of the analysts rated the stock but did not provide any target price.

The analyst (CSFB) with lowest target price applied DCF techniques with comparable analysis method for calculating target price. The analyst (Oppenheimer) with the highest target price applied Sum-of-the-parts analysis for calculating target price.

Additional Information

During 4Q, CHTR lost 83,100 analog video and 14,200 digital video customers, and gained 64,500 residential HSD and 5,200 telephony customers.

In November 2004, Charter issued $862.5 million original purchase price of 5.875% Convertible Senior Notes due 2009. With the proceeds, the Company purchased a portfolio of U.S. Treasury securities as security for certain interest payments on a 5.875% Convertible Senior Notes and redeemed $588 million principal amount of its 5.75% Convertible Senior Notes due 2005. In December 2004, the Company issued $550 million Senior Floating Rate Notes due 2010 providing additional liquidity.

Long-Term Growth

Only one analyst (Oppenheimer) has projected 5% long term EPS growth for the company.

Prospects for long-term growth at Charter Communications remain a challenge. Budgetary constraints on marketing efforts put the company at a competitive disadvantage against rising competition in both video and high-speed data services. Regional Bell operators have recently increased marketing efforts and lowered pricing on high-speed DSL offerings. Cable remains a higher quality product, but significant price competition and greater marketing spending from DSL providers could bifurcate the market and significantly curtail Charter’s growth prospects in profitable high-speed data services. Aggressive pricing remains a strong possibility within the company’s core video market as well. Charter continues to face strong competition in its rural markets from DBS operators. Under the direction of News Corp., a historically aggressive competitor, DirecTV may be in a position to exploit its parent company’s programming content and lower cost distribution to take share from a financially constrained Charter Communications. Cutbacks in capital spending could limit the company’s ability to market and rapidly deploy advanced new services, retarding growth and possibly resulting in lost market share. Minimal investment in line extensions, a slowdown in plant upgrades and a reduction in marketing efforts place Charter Communications at a competitive disadvantage against better-financed competitors. Barring a material capital restructuring, the prospects for long-term growth at Charter Communications remain challenging.

Management is optimistic about its upcoming Wireless Voice Plan and states that dual mode chip sets are coming into the market which provide benefits in the form of increased ARPU (Average Revenue Per Unit) and decreased subscriber churn. Management also stated that discussions with providers are currently under way but that the product introduction will not likely occur until the 2006-2007 timeframe.

Recently CEO Robert May said “with a renewed sense of operational excellence, we're focused on basic blocking and tackling, including service delivery, customer care and the deployment of new products. Our objective is to capitalize on the unrealized value of the Company and its delivery platform. By driving improvements in service delivery, customer care and new product offerings, we will improve the value proposition to our customers."

Individual Analyst Opinions

NEUTRAL RATINGS

Stifel Nicolaus Stock is rated Market Perfom with no price target.

Banc of America –Stock is rated Neutral with price target of $2.50.

Analyst believes that cable stocks should maintain a positive momentum over the next few months. However, analyst remains neutral on CHTR and says that ‘the recent infusion of fresh blood at the company is encouraging, but with no visibility of an operational turn-around or the requisite balance sheet restructuring.’

Oppenheimer Stock is rated Neutral with $2.78 price objective.

Analyst believes that an operational turnaround at CHTR and subsequent improvement in capital structure may be pushed back into 2H05 due to continued operational challenges as evidenced in 4Q results and the continued management turnover.

Friedman, Billings –Stock is rated Market Perform and lowered price target to $2.

Analyst notes that CHTR posted mixed 4Q results that includes in-line financial metrics but weak subscriber metrics. Analyst lowered price objective because of higher capital expenditures and deteriorating subscriber trends.

Wachovia- Stock is rated Market Perform with target price valuation rage from $1 to $3.

Analyst believes that “range of the possible future equity value is wide due to the fact that over 90% of CHTR’s Enterprise Value is debt and given the possibility of debt redemption, equity for debt exchanges and future equity contributions from Paul Allen.”

Tradition Asiel –Stock is rated Hold with price target of $2.

“CHTR remains in a debt trap, without the adequate balance sheet flexibility to catch up to MSO peers with regard to new product availability without sacrificing free cash flow profile.” Analyst notes low visibility, instability in the executive suite and expensive valuation at CHTR.

UBS – Stock is rated Neutral with price target of $2.

CIBC – Stock is rated Sector Performer with no price target.

“As part of its turnaround CHTR is re-focusing on high-end, low churn customers and is phasing out deep discounting activity, which began in 3Q04. This process will probably take at least two quarters to bear fruit.”

NEGATIVE RATINGS

AG Edwards –Stock is rated Sell with no given price target.

Analyst believes that company’s poor fundamentals continue to provide potential downside to the CHTR stock because of premium valuation in comparison to its peers, and the over-leveraged position of its balance sheet.

Bear Stearns – Stock is rated Under perform with no price target.

CSFB – Stock is rated Under perform with price target of $1 price target.

Analyst believes that stock price has further downside due to its weak fundamental performance and its high financial leverage.

J.P. Morgan – Stock is rated Underweight with no price target.

Analyst views the CHTR shares as overvalued and expects them to under perform compared to its peers because of weak operating performance, high leverage and pending debt maturities.

Smith Barney – Stock is rated Sell with price target of $1.75.

Analyst is not confident about CHTR due to the Company’s high leverage and vulnerability to its satellite competition and customer churn. Analyst finds that even after adjusting for recent weakness in the stock, CHTR trades at a premium to the peer group average.

-----------------------

March 31, 2005

Ian Madsen, MBA, CFA, Editor

imadsen@

Marla Harkness, MBA, CFA, Senior Analyst

Assisted by: Paresh Gandhi

[pic]Research Digest

155 North Wacker Drive Chicago, IL 60606

-----------------------

[pic]

Zacks Investment Research Page 2

© Copyright 2005, Zacks Investment Research. All Rights Reserved.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download