Liberty Broadband is Charter at a 28% discount
Following the disastrous market reaction to the Q4/23 earnings release by Charter (CHTR), the investment case for its largest shareholder Liberty Broadband (NASDAQ:LBRDA) (NASDAQ:LBRDK) (OTCQB:LBRDB) has become even more compelling.
As recently noted in my article “How To Buy Charter At A 50%+ Discount”, Liberty Broadband owns 26% of Charter, worth $13.5B after the crash, the Alaskan telecom GCI (acquired in 2017 for an EV of $2.7B), less $2.6B of net debt (excluding GCI’s own debt). Yet it currently trades for just $9.7B. Assuming the value of GCI compensates for the debt (a very conservative assumption in my opinion, as GCI should have grown its value over the past 7 years), Liberty Broadband trades for 28% less than the value of its CHTR holdings (38% upside from today’s prices versus NAV). Since I believe Charter stock itself is undervalued, the overall discount to fair value is likely closer to 60%.
Charter Q4/23 earnings review
You can find a more complete review in my recent article on Charter’s Q4/23 earnings and the subsequent sell-off. This is just a quick recap:
Key performance indicators were unexciting at best: Only revenues were in line with expectations, while EPS badly missed because of a pension remeasurement which consensus estimates had not accounted for.
Q4 net broadband additions were negative 61,000, which means that Charter only added 155,000 broadband subs for the full year, which is just a tenth of the previously usual expansion level.
The company used all its FCF for share repurchases, which, together with roughly flat EBITDA, means that debt and leverage remained about flat YoY.
Moreover, the long-term capital expenditure outlook released within Charter’s slide presentation matched sell-side expectations.
Finally, another negative relates to the Affordable Connectivity Program (“ACP”): As disclosed in Charter’s 2023 annual report, ACP
provides eligible low-income households with up to $30 per month towards Internet service. The FCC has announced that ACP funding is expected to run out in April 2024 and has prohibited service providers from enrolling new ACP customers after February 7, 2024.
Charter has about 5 million ACP-supported customers, most of which were customers even before they received subsidies. Charter is obviously keen on keeping all customers and has contingency plans in place. E.g. it might offer temporary discounts for all those that would otherwise not be able to pay their bills. In addition, ACP funding could be secured again, as there are bipartisan efforts to allocate fresh funds for the program, which is very popular among Republicans and Democrats alike. The program indirectly helps around 64 million people to stay connected, so a disruption seems a bad move in an election year. CNN has some details on the current efforts to refund ACP.
No changes to Liberty Broadband investment thesis
As discussed in my article on Charter, I do not believe the often repeated thesis that the abysmal stock market reaction was due to the broadband subscriber loss, since at the beginning of December 2023 the company’s CFO had already guided to a net subscriber loss in Q4 during an investor conference. After Charter had sold off 8% on that day, it recovered almost the entire losses in subsequent weeks.
Everything bad about Charter’s earnings release had already been telegraphed before. This is why I presume that the sell-off was mostly due to some short-term speculation around the earnings release (maybe helped by some unduly optimistic sell-side report) which attracted rather shaky hands to the stock, based on superficial fundamental analysis and a favorable peer group and technical setup.
Based upon its long-term capex guidance, we can project Charter to make about $8.5B of FCF in 2027, with an expanded footprint and competitive speeds everywhere following its network upgrade initiative. Fixed wireless will have hit its capacity constraints. As far as fiber is concerned, I believe it will mainly remain a means for current DSL providers to keep their share relatively constant. So I expect Charter to grow earnings from there and to be valued accordingly.
Today’s market cap of $51.7B corresponds to just 6x FCF(2027e). This lowish valuation clearly reflects the many near-term negatives which would be foolish to ignore. However, by purchasing our Charter exposure through Liberty Broadband tracking stocks, we get an additional 28% discount, meaning we are effectively paying just 4.4x look-through FCF(2027e).
Many things can go wrong, but a large margin of safety certainly helps. Even if Charter became a no-growth stock, it would certainly deserve an 8x FCF multiple. This means that even if FCF in 2027 was just $6.5B, i.e. $2B lower than currently projected, it should still have the same market cap of today. While both Charter and Liberty Broadband investors would have owned dead money for 3 years, Liberty Broadband owners would still keep their 38% upside potential intact. And Liberty entities have a history of closing their NAV discounts in a tax efficient manner sooner or later.
Finally, thanks to regular share repurchases, Liberty Broadband is virtually certain to outperform Charter, as the company sells Charter stock to finance buybacks of its own shares at a discount. Basically, Liberty sells Charter for $319 and buys it back immediately for $229. This is nothing else than printing money.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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