Charter's stock is down 20% this year - but Citi sees new reason to sell

By Emily Bary

Citi downgrades Charter's stock, warning that estimates could be too high

Charter Communications Inc. shares have lagged this year, falling more than 20% as the S&P 500 has increased almost 16%.

But Citi Research analyst Michael Rollins sees more room to fall, and he downgraded Charter's stock (CHTR) to sell from neutral in a late Tuesday note to clients.

"We believe Charter faces risk to both estimates and valuation as the organic broadband environment is getting tougher relative to consensus expectations," Rollins wrote in his downgrade.

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He worries about pressures related to the discontinuation of the government's Affordable Connectivity Program, which offered discounts on internet service to eligible customers until funding ran dry earlier this year.

The end of the program "is likely to exacerbate broadband subscriber & revenue headwinds over the next 12 months," Rollins wrote. He thinks Charter could see more headwinds related to this dynamic in the third quarter than in the second quarter.

"We view the upcoming 2Q and 3Q results as potentially negative catalysts that are likely to highlight the headwinds on broadband pricing and volumes, especially with the recent discontinuation, and unlikely revival, of ACP," Rollins said in his report.

He also has concerns about what he views to be elevated expectations for earnings before interest, taxes, depreciation and amortization. Not only must Charter contend with a challenging broadband backdrop, but it will also be without major political advertising next year. He pegs the "estimate risk" on Ebitda to be 2.6% relative to the consensus view.

"With elevated financial leverage, we believe the estimate risk without change to the multiple represents about 7% downside risk for the shares," Rollins continued.

His new price target of $255, down from $280 before, implies 16% downside from Tuesday's close. The stock is down 1.5% in premarket trading Monday.

Though Charter shares are down on the year, they've clawed back a bit over the past couple months. Rollins wrote that Charter shares have "returned to a premium valuation," with an estimated core cable enterprise-value-to-Ebitda multiple of 6.6x. That compares with 6.1x for Comcast Corp. (CMCSA) and 5.9x, on average, for Verizon Communications Inc.(VZ) and AT&T Inc. (T), he said.

"We believe a tougher environment for top-line broadband growth could lead to multiple contraction back towards 6.0x Ebitda for Charter, especially with its greater financial net debt leverage," Rollins noted.

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-Emily Bary

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07-03-24 0821ET

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