Charter Communications: Why it’s a safer investment as compared to its rivals
In the last year, Charter Communications shareholders saw a drop in share from about $400 to $300. However, the company didn’t fail to produce satisfactory results in performance. In the latest quarter, sales rose up to almost 5% and the company keeps making moves that will increase long term value.
Here are 3 reason why Charter is a better investment for shareholders.
- John Malone vouches for Charter.
John Malone can be considered the best investor of all time. He has been able to take businesses that he’s led to great success. For a while now, Malone has earned investors more than 30% per year. During his time as the CEO of TCI, a cable company, he generated a 30.3% yearly return. Between 2006 and 2014 Malone also generated 30% yearly returns for his Liberty Empire. So let’s just say, It’s a good thing when Malone likes your company.
- The economics of cable are fantastic.
Although many investors are worried about cord cutters leaving the industry and “cord-never” who have never signed on for cable services, many fail to see the impressive economics of high-speed data, which is considered the “other cable.” For example, rival Cable One (NYSE: CABO) notes in its annual report that its data and business services units generate EBITDA margins that are four and five times greater, respectively, than its video unit. In other words, the much smaller Cable One can generate margins better than 50% of sales, and it has industry-leading margins. And Charter has focused exclusively on its cable franchise, rather than diversify into content, as rival Comcast (NASDAQ: CMCSA) has done with its ownership of NBCUniversal. While Comcast’s overall EBITDA margins suffer due to the lower-margin content business, Charter’s margins have climbed over the past five years as it’s reinvested in its cable operation. I expect margins to continue to trend higher over time.
- CEO Tom Rutledge is incentivized with options
CEO Tom Rutledge is considered by investors as the top operator in the cable industry. After seven-plus years as COO at Cablevision, Ruyledge made the leap to CEO at Charter in the year 2012. He owns more than $85 million in stock at current prices and stands to hold even more if the stock can reach certain milestones in the coming years.
According to info acquired from fool.com, in early 2016 Rutledge signed a contract that pays him one-fifth of his total options package at various stock prices: approximately $290, $365, $456, $497, and $564. The options entitle him to purchase stock at each level and really become valuable once the stock exceeds those thresholds. Charter has only just recently surpassed the lowest threshold after dipping below $290. To obtain the maximum value of these options, Rutledge needs the stock to run as high as possible, but certainly above $564 per share, where the last set of options goes “in the money.”
Knowing this gives us insight into what the CEO might have been thinking last year when it was revealed that Softbank had reportedly bid $540 a share for Charter. Some have speculated that Rutledge would like to see a company bid over $564 a share, in order to realize the full value of his compensation package. A still-higher price would be even better as his lower-priced options become worth even more. Earlier in 2017, Verizon had bid a reported $350 to $400, a figure that Charter summarily snubbed. With the stock around $320 per share, a buyout at a substantial premium would be a positive.