Charter Communications Inc - Class A

Despite the challenges faced by Charter Communications (CHTR), including competition from fixed wireless and fiber, we believe in the company's long-term potential. CHTR has a large core group of subscribers unlikely to switch, and there is strong visibility on capital expenditure reductions leading to massive free cash flow expansion. The company's management is aware of the need to reduce debt levels, targeting a post-Cox leverage of 3.5x. The long debt tenor provides a buffer, allowing for potential equity upside even if the business faces permanent impairment. The recent stock volatility presents a price-value gap that we find attractive.

Charter Communications will become the largest cable operator in the U.S. when its acquisition of Cox closes. Cable has been a disappointing area, with heavy competitive pressure and minimal growth. We see Charter equity as a cheaply priced option. 80% of the capital structure is low-cost long-term debt. With a free cash flow yield that will exceed 30% in a couple of years, the company is enormously liquid and can both de-lever and return cash to shareholders. In time, we expect the company to be consolidated by Comcast, a telco, or even a non-traditional buyer. The equity could be up by a multiple in certain scenarios.

Despite recent weakness in Charter Communications' stock price due to competitive pressures in the broadband market, we remain optimistic about its future. The company's growing wireless business, anticipated reduction in investment spending, and the impending combination with Cox are all positive indicators. These factors suggest that Charter is well-positioned to navigate current challenges and capitalize on future growth opportunities.

Charter Communications is the second-largest broadband communications service company in the US, providing cable broadcasting, internet, voice and mass-media services. We continue to view Charter as a high-quality business with difficult-to-replicate assets that generate steady cash flows and returns cash to shareholders.

The letter discusses the Fund's performance and mentions Charter Communications as a key detractor from relative results, but does not provide a directional argument regarding its future prospects.

Charter Communications demonstrated strong cash flow growth in its full year results, and management has indicated that declining capital expenditure requirements in the coming years will support this trend. The company plans to continue share repurchases while lowering leverage, which is a positive signal for investors. Despite the favorable market response, the valuation remains largely unchanged, suggesting that the share price is still below its potential. The combined positions of Charter and Liberty Broadband account for 7.1% of the Fund.

Charter Communications, Inc. is one of the largest connectivity companies in the U.S., providing broadband, video, mobile, and voice services under the Spectrum brand. Its robust hybrid fiber-coaxial network creates a significant competitive moat, passing over 57 million homes and businesses. Charter's strategy focuses on high-speed broadband as the primary driver of customer relationships, supported by a multi-billion-dollar network evolution initiative to upgrade to DOCSIS 4.0 technology. This positions Charter to effectively compete with fiber providers and meet increasing bandwidth demands. Additionally, the convergence of services through Spectrum Mobile enhances customer lifetime value and reduces churn, while expansion into underserved rural areas creates a long runway for growth.

Charter Communications, Inc. is one of the largest connectivity companies in the U.S., providing broadband, video, mobile, and voice services under the Spectrum brand. Its robust hybrid fiber-coaxial network creates a significant competitive moat, passing over 57 million homes. Charter's strategy focuses on high-speed broadband as the primary driver of customer relationships, supported by a multi-billion-dollar network evolution initiative to upgrade to DOCSIS 4.0 technology. This positions Charter to compete effectively with fiber providers and meet increasing bandwidth demands. Additionally, the convergence of services through Spectrum Mobile enhances customer lifetime value and reduces churn, while expansion into underserved rural areas creates a long runway for growth.

Despite improvements in several areas, second quarter results fell short of Wall Street’s expectations. In the current environment, earnings 'misses' are severely punished, and Charter was no exception. To be sure, we would prefer stronger operating results. That said, Charter remains on track to complete its network upgrade plans. As that spending winds down, we expect significant free cash flow growth and an acceleration in Charter’s value-creating share buyback program.

Despite a challenging period with a return of -27.8% due to weaker than expected broadband growth, we remain confident in the longer-term prospects for Charter Communications. The company is well-positioned to benefit from the ongoing demand for broadband services, and we believe that its fundamentals will support a recovery in performance. Our commitment to this holding reflects our belief in its potential for future growth as market conditions improve.