On Mar 13, Charter Communications Inc. (CHTR - Free Report) was downgraded to a Zacks Rank #4 (Sell). Charter Communications is the second largest cable multi service operator (MSO) in the United States after Comcast Corp. (CMCSA - Free Report) .
Why the Downgrade?
Charter Communications operates in a saturated and competitive multi-channel U.S. video market, which is a concern. Like other cable operators, the company has been losing subscribers to online video streaming service providers such as Netflix, Hulu.com, YouTube and others. Notably, in fourth-quarter 2017, Charter Communications had 16.544 million video customers in the residential segment, down 1.7% on a year-over-year basis. However, the company has managed to gain 2,000 video customers in the reported quarter, despite cord cutting. The company is expected witness similar subscriber loss this year as well.
Further, poaching customers from competitors is a difficult task as most pay-TV operators are offering innovative packages. Moreover, the U.S. pay-TV industry is affected by the ongoing massive consolidation between telecom and cable-TV operators.
Charter Communications’ high debt level is a potential hazard. At the end of 2017, Charter Communications had $621 million of cash and cash equivalents and $70,231 million of outstanding debt compared with $1,535 million and $62,464 million, respectively, at the end of 2016. The debt-to-capitalization ratio at the end of 2017 was 0.59 compared with 0.54 at the end of 2016.
Charter Communications has not performed well in the past six months. Shares of Charter Communications have declined 4.5% as against the industry’s decline of 6.6% in the said timeframe.
Charter Communications’ trailing 12-month return on equity (ROE) undercuts its growth potential. Charter’s current ROE stands at 1.1% compared with the industry’s ROE of 13.8%. Moreover, in terms of price-to-earnings ratio (P/E - F1), the stock appears to be grossly overvalued. The stock currently trades at a P/E ratio of 83.2 compared with 21.1 for the industry.
Notably, the stock has an unattractive VGM Score of C, which complements its discouraging valuation. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.
Negative Earnings Surprise
Charter Communications has a distressing earnings surprise history. The company’s earnings lagged the Zacks Consensus Estimate in three of the previous four quarters, resulting in an average miss of 36.7%.
Certainly Not a Broker Favorite
Given the challenges faced by the company, the stock is not a favorite pick for brokers right now.
Over the last 30 days, the Zacks Consensus Estimate of earnings for first-quarter 2018 has gone down 13.6% to 51 cents per share. For full-year 2018, the estimate has gone down 4.4% to $4.32.
Given the wealth of information at the disposal of brokers, it is in the best interests of investors to be guided by broker advice and the direction of their estimate revisions. Notably, the direction of estimate revisions serves as an important pointer when it comes to the price of a stock.
Stocks to Consider
Top-ranked stocks in the broader Consumer and Discretionary sector are Cable One (CABO - Free Report) and AMC Networks (AMCX - Free Report) . While Cable One carries a Zacks Rank #2 (Buy), AMC Networks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Cable One’s bottom line has surpassed the Zacks Consensus Estimate in two of the previous four quarters with an average beat of 2.7%. AMC Networks surpassed the consensus estimate in all the trailing four quarters with an average beat of 24.3%.
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