Cramer’s been a fan of Charter Communications since February, but the stock has been an underperformer. He was about to question his convictions until two key things happened.
First of all, Comcast and a little Midwestern cable company called Insight Media unwound a joint venture, which gave Comcast control of the assets in Illinois and Indiana. The two companies didn’t put a total value on the deal, but Cramer’s calculations put each subscriber at as much as $4,583.
Enterprise value per subscriber is the key metric for cable, and Cramer was struck by how much Comcast was willing to pay for each subscriber. Charter is only valued at about $4,017 per sub – 12% less than Insight Media – and it’s in Missouri, which isn’t too far from the Indiana and Illinois cable markets.
The other key thing that caught Cramer’s attention was that Comcast bought another little cable company, Patriot Media of New Jersey, for $5,963 per subscriber. That’s almost 50% more than where Charter is currently valued. As far as Cramer is concerned, that makes Charter too cheap. If Comcast is willing to pay such a high price for subscribers, then Charter not only deserves to go higher, there’s a good chance it could end up being acquired.
Comcast CEO Brian Roberts knows the business, Cramer says. He understands that the triple play (cable, internet, phone) makes the cable business a winner. The subscribers are worth more and more money as they add services like internet and phone as well as digital and on-demand offerings. Cable is beating the telcos with their triple-play offerings, and the cable companies are all worth more than we thought. Why? Because the CEO of the biggest cable company in the U.S. is willing to pay more for them.
Buying Comcast would be the safer play, but Cramer says that Charter has more upside. It is carrying heavy debt right now, but low interest rates and its aggressive strategy of paying down that debt are putting Charter's balance sheet in better order day by day. This is one of the reasons Cramer liked the stock in the first place. But now there’s a new reason to like Charter: Its 5.4 million cable subscribers are worth a lot more to the big dogs than originally thought, and in light of that, Cramer thinks this company could be taken over.
Bottom Line: Don’t give up on CHTR, Cramer says. He knows it’s a dog, but it’s not Vonage the dog. And with these two moves from Comcast, Cramer believes it has a lot more upside than the Street is willing to acknowledge.
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