Anyone who thought that Wall Street expectations for the combined Charter Communications, Time Warner Cable and Bright House Networks weren’t high just got a wake-up call this morning, after influential media analyst and MoffettNathanson principal and senior analyst Craig Moffett slapped a $305 per share price target on the stock.
Moffett’s new target is a nearly 40% upside to Charter’s opening price this morning – which rose about 3% ($6.32 each) in early trading to $225.26 per share on the news of the upgrade – and in Moffett’s view could be conservative. In a 64-page report detailing his outlook on the new Charter, Moffett estimated that the country’s second largest cable company could generate more than $30 per share in free cash flow by 2020, more than eight times the $4.10 per share expected by the end of this year.
In his report, Moffett noted that while much of the synergies and expectations that Charter will increase product penetrations are seemingly already built in to the stock’s robust 9.1 times cash flow multiple, Moffett sees more room for growth.
“Despite the stock’s seemingly elevated multiple, Charter’s stock still appears to us to be too cheap,” Moffett wrote.
Charter completed its mergers with Time Warner Cable and Bright House on May 18. The combined company, which has 17.3 million video customers, 19.4 million broadband subscribers and 9.4 million telephony subscribers has said it expects to full integrate the purchases in the next 18 months to 2 years.
According to Moffett, Charter should be able to easily extract the $800 million in expected cost synergies from the combination -- $400 million of that through lower programming costs alone. With its legacy digital conversion complete, and the full company on pace to finish its conversion by 2018, capital expenditures should decline. Moffett also predicts the new Charter will grow residential video subscribers by 1% per year to 17.8 million and broadband customers by 7.3% annually to 28.1 million by 2020, which should drive financial growth. He predicts that revenue will rise 7.8% annually, reaching $53.03 billion by 2020, and cash flow increasing 10% per year to $21.6 billion in the next five years. Cash flow margins, currently at around 35%, should reach 40% in the same period.
“It’s tempting to feel that Charter is due for a breather simply because its shares have done quite well of late …,” Moffett wrote. “Our analysis suggests otherwise.”