Neil Smit's shakeup at Charter Communications Corp. is helping the Des Peres-based cable television company win rare but cautious accolades from some Wall Street analysts.
"We are upgrading Charter from Sell to Buy and raising our price target from $1 to $1.75. We are maintaining our Speculative risk rating," Jason Bazinet, an analyst at Citigroup, wrote in a recent research note to investors. "After three years of flat EBITDA (earnings before interest, taxes, depreciation and amortization), we expect Charter to grow EBITDA over 9 percent per annum through 2010."
Last month Lale Topcuoglu, an analyst at Goldman Sachs & Co., advised risk-tolerant investors to consider taking a second look at Charter. The company's first-quarter results, he said, were "encouraging" and "showed improvement in operating metrics across the board." Topcuoglu rates Charter's stock as Neutral.
Aryeh Bourkoff, an analyst at UBS Securities LLC, reaffirmed Charter's stock as a Buy July 5. "We believe the (Charter's) equity stands to realize the latest benefit from potential future improvement to the company's liquidity," Bourkoff wrote.
Charter's stock closed at $1.18 a share July 12.
Renewed optimism for Charter, the fourth-largest cable operator in the United States, is the result of work Smit has been doing to reinvigorate the company since he took over as president and chief executive in August 2005. He replaced Carl Vogel, who had quit eight months prior.
Key things Smit has done at Charter include refinancing portions of debt, which totaled about $19.5 billion at the end of the first quarter. Early this month, the company closed on its sale of certain cable television systems to Jerry Kent's Cebridge Acquisitions Co. LLC and New Wave Communications for about $896 million.
The debt restructuring at Charter occurred at the end of April when the company refinanced $6.85 billion of its senior secured financing, extending the period to repay the debt and renegotiating lower interest rates. Smit also has been aggressively pushing Charter into the Voice Over Internet Protocol (VoIP) telephone market, a sector where analysts say cable companies currently have an edge over traditional telephone companies.
Smit, in a recent discussion with analysts, said VoIP is now available to about 4 million of its subscribers, and the company is on track to increase that number to 6 million to 8 million homes, or 47 percent to 63 percent of its total market. In the first quarter, the company had 191,000 telephone customers, an increase of nearly 60 percent compared to the same quarter in 2005.
Charter has not detailed how it intends to use proceeds of the asset sales, but Jeffrey Fisher, the company's chief financial officer, said the funds will help it meet its cash needs through 2007. The $6.85 billion debt restructuring, he said, will save Charter about $26 million annually in interest payments.
Bourkoff said the combination of selling some assets, refinancing debt and growing VoIP subscribers at Charter will likely help the company achieve double-digit growth in EBITDA in 2007.
EBITDA is an important measure, especially for cable companies, because it enables investors to evaluate how much cash a company is generating in the absence of non-cash expenses such as depreciation and amortization. Cable companies like Charter record millions of dollars in depreciation and amortization expenses in current financial reports, for investments they made in prior years.
Tom Leritz, an analyst at Argent Capital Management in Clayton, said Charter is likely to see growth in telephone subscribers as have other cable companies such as Comcast and Time Warner Inc., especially by offering customers a "triple-play package" that includes voice, data and television services. Cable companies have a head start over traditional telephone companies, because they don't have to spend billions of dollars to build new high-capacity telecommunication lines, he said.
While Topcuoglu advised risk-averse investors to take another look at Charter, he also reminded them that there are no traditional valuation methods to justify the company's current stock price because of the debt size. In fact, he stated Charter could file for bankruptcy protection if it doesn't restructure more debt.
