Different countries and economies have different high growth areas. For example, in countries like Bangladesh, the high growth area is in textiles and clothing manufacturing. In Thailand, there is a high growth industry in the production of consumer vehicles. Taiwan has been dominant in the area of semiconductor and microprocessor production for many decades now.
Companies that can operate in the high growth areas of an economy get an advantage of growing in an expanding market. This allows them to build their customer bases and revenues more quickly than businesses that are trying to win market share in stable or declining markets.
In the United States, one of the high growth areas is in high speed internet communications and media services, which includes the provision or services that allow customers to access hugely popular products like Netflix and other streaming services. Charter Communications, Inc. (NASDAQ:CHTR) is a company that is exposed to both of these growth areas, which has seen their share price grow from lows of around $150 at the beginning of the year to recent highs above $190. There has been some recent share price weakness after those recent highs, so the question for options trading advisory services to answer is: “is this a good opportunity to buy Charter Communications?”
Understanding the Business
Charter Communications is a relatively youthful company in an industry dominated by businesses that have been around as long as the telephone. It was founded in 1993 as a cable television company. Now, it bundles its cable services with the high growth area of broadband communications.
This bundling is key because is allows Charter to be exposed to the explosive growth of streaming video on demand services like Hulu and Netflix. These services allow television shows to be beamed directly to television through the internet, and give customers the freedom to watch shows whenever they want, rather than having to be tied to a television schedule.
Charter also has a related business in telephone and phone services, with a small number of subscribers of around 2 million nationwide. The more popular and
profitable services offered by the company are the Charter Internet and Charter TV services.
The attractiveness of the companies operating model comes from their ability to group their services into attractively priced “bundles” that allow customers to save money and the business to generate higher revenues.
Metrics and Measures
The most recent results that were announced to the market showed that Charter Communications strategy of growing through bundling services was working well.
The revenues for the first quarter were $2.4 billion, which was a 7.3% increase on the previous corresponding quarter. The growth in total revenues was underpinned by residential revenue growth of 6.7%, while the smaller commercial services division grew its revenue by 14.8%.
The company also spent $351 million on capital expenditure during the year, which was well down on the $539 million it spent in the first quarter of 2014. This shows that the large scale spending that was required to put Charter in a competitive market position is complete in the short term, and more capital expenditure that will drag on future profits is less likely.
Charter was able to sign 86,000 new households in the residential sector in the first quarter, which was part of a yearly increase of 254,000 new users. The increased subscriber numbers combined with lower levels of required spending has led to a much higher level of free cash flow generated by the company, with $101 million in the first quarter 2015, compared to only $74 million in the same quarter in 2014.
The Investment Case
In addition to a proven and successful strategy of providing customers with a choice of “bundles” of products, Charter has also pursued rapid growth through buying other businesses.
Recently, Charter was in the news for a headline grabbing $55.33 billion deal to buy Time Warner Cable. The move has been described as transformative for Charter, as the purchase will create one of the largest internet and television service providers in the United States.
The move also catapult Charter into direct competition with the multi billion dollar Comcast for the market share across the country.
The investment case from now on will be largely determined by how quickly Charter can integrate the acquisition into their product offering and effectively win market share from the large industry players like Comcast. In addition, as growth for Charter slows, a key measure of success will be its ability to keep their rates of “churn” low. Churn is an industry term that refers to how many customers are lost every quarter, as a percentage of total customers.
Charter Communications is a well managed company that is exposed to two major growth industries in a strengthening US economy. It has recently made an acquisition of Time Warner Cable that could make it a major industry player, and the future success of the company depends on the ability of management to quickly integrate their purchase and use it to offer more attractive services and products to their customers.
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