High-speed internet upgrade spending sinking this cable stock

Credit Suisse’s Douglas Mitchelson lowered his price target on Charter as spending accelerates well beyond his above-Street estimates

Charter Communications (CHTR) is planning a large-scale broadband expansion, the announcement of which has sent the stock into negative territory as the cable company’s plans will cost far more than previously expected by analysts. The spending budget unveiled on Tuesday night starts with $10.7B next year, and a cable upgrade that will cost $5.5B to speed up data traffic.

SPENDING PLANS TO UPDATE NETWORK: Charter Communications said in its investor meeting slides that its targets to spend $5.5B in capital expenditures for a network evolution footprint. The $5.5B will be partly offset by capital expenditure and operating expense efficiencies as a result of network evolution, Charter noted. The company plans on expanding plant capacity from 750/860 MHz to 1.2 GHz, with 1.8 GHz DOCSIS 4.0 capable equipment in whole markets across much of its footprint. The network evolution should be essentially complete by the end of 2025, according to Charter. The company currently expects full year 2023 capital expenditures, excluding line extensions capital expenditures, to be between $6.5B and $6.8B, and a further $4B in line extensions. Charter currently expects capital expenditures, excluding line extensions capital expenditures, to peak in either 2024 or 2025 due to network evolution, and to decline thereafter.

TARGET DECREASES: Following Charter’s spending plan announcement, several Wall Street analysts lowered their price targets on the shares. Among those, Credit Suisse analyst Douglas Mitchelson lowered the firm’s price target on Charter to $541 from $551, while keeping an Outperform rating on the shares. The analyst noted that as expected, Charter’s Analyst Event was predominately focused on a material increase in capex for plant expansion, mainly rural builds, and its "network evolution" path to its high-split / DOCSIS4.0 future. However, spending is accelerating well beyond the analyst’s above-Street estimates, with the update increasing his capex estimates and accordingly lowering Charter’s free cash flow outlook for at least the next few years.

RBC Capital analyst Kutgun Maral also lowered the firm’s price target on Charter to $460 from $480, maintaining an Outperform rating on the shares. Maral acknowledged that Charter’s investor meeting provided an attractive outlook for its network evolution, footprint expansion, converged go-to-market strategy, and efforts around improving the customer experience. Further, the analyst told investors that is encouraged the target cost to upgrade the network is only about $100 per passing. However, and while the analyst walked away with the firm’s constructive longer-term outlook reaffirmed, he is cautious on how the free cash flow cuts will be digested.

Keeping an Outperform rating on the shares, Cowen analyst Gregory Williams cut his price target on Charter to $649 from $670 following the investor meeting in which the company announced an acceleration of its network upgrade and expansion plan. The analyst highlighted that Charter’s plans will come at higher capex over the next three years.

PRICE ACTION: In Wednesday morning trading, shares of Charter have dropped over 12% to $344.50. Other names in the space are also trading lower, with Comcast (CMCSA) down almost 2% to $36.02 and Altice USA (ATUS) down 4% to $4.15.

Keywords: charter communications, broadband, internet, cable, spending