Business

Charter (CHTR)/GCI Liberty (GLIBA) Update

By Long Term Value

Well, Charter Communications (CHTR) stock tanked 15% on Friday (4/27/18), and you know me, I’m a sucker for something on sale! Yup, I picked up a position in Charter at around the $252/share level and purchased a bit more GCI Liberty (GLIBA) at around $45 a share. I had originally purchased some Liberty Ventures back in January for around $57 a share (before it was spun out of Liberty Interactive and merged with GCI Communications in March), so adding at $45 was a no-brainer for me.

John Malone

The question is, did I buy shares in a good company at an discounted price? or did I buy a shares in a declining company trading at their 52 week low only to watch it subsequently go down another 50%? I really don’t know …. yet! I like the company’s management (Tom Rutledge) and the controlling shareholder (John Malone). Both have provided investors in their companies with superior returns in the past. The company’s relevance in the video/data delivery business doesn’t seem in question to me AT THIS TIME. (Note: I’m not very good at predicting the future) The downdraft on Friday, it appears to me, was caused by a slight, unexpected increase in the loss of video subscribers (122k in 2018 vs 100k during the same period last year) perhaps combined with an increase in capital expenditures for the quarter that was not anticipated (by Wall Street). All the other metrics looked positive for the quarter, including growth to bottom line income. My experience in this business is that quarterly results for these types of distribution companies can be rocky, and quarterly performance is not necessarily indicative of long-term performance. I’m willing to give these highly qualified jockeys a chance to prove themselves (once again) because I can buy shares in this company at 85% of what I could buy in at just a day earlier and 65% of what shares  could be purchased for at the high over the last 52 weeks.

So lets see… Netflix at 250x earnings or Charter at 8x earnings. Hey I’m a value guy! I want good return on capital for my money now, not the promise of huge (?) cash flows 5, or perhaps 10, years down the line. Not every one agrees with this way of thinking. Momentum investors have been very successful over the past 5 years and FAANG stocks… well, results speak for themselves. But I want to sleep at night.

So the question is why buy Charter stock directly and not GCI Liberty or Liberty Broadband? I will admit, my first instinct was to add to my GCI Liberty position (which I did…. a little) when I saw the price decline. But on further reflection I noted that both Charter and Liberty Broadband (a surrogate for owning Charter given that it has no operations but simply owns Charter shares) declined in the order of 15% by mid-day Friday while GCI Liberty declined by only 10.5 %. Of course GCI Liberty owns both the GCI business and Charter shares (both directly and through Liberty Broadband share ownership), the former making up about 20% of the total market cap of the combined company. [OK, I’m using the ownership % of former Liberty Ventures and GCI Communications as a surrogate for the relative ‘value’ of the two components of GCI Liberty … its called shorthand!] So we might expect GLIBA shares to have declined only by 80% of what we saw Charter shares decline. In fact GLIBA shares did decline almost 11% vs the 12% I would have expected (80% of 15%). But my thinking when purchasing a full position in Charter was that Mr. Market was offering me the bigger discount through a direct ownership of Charter shares. THAT’S where I wanted to put my money! The bigger bang for my buck.

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