Charter is undervalued - Here's why.

CHTR closed Q-2 with 119mm shares. At the current price of $124 per share, that translates to a mkt. cap of roughly 14.7B. Additionally, the FMV of their bond debt is approximately 10B less than the principal. Last Q CHTR bought bonds and booked a 243mm gain, while decreasing debt by approximately 1B. With the accurate share count and the embedded value in the FMV of the debt, my estimate of EV is roughly 95B, not the widely reported estimates of 111-113B.

CHTR is nearing the end of a large multi-year network upgrade. Capex, which has been coming in at roughly 11.5B for three years, will decline to 9.5B in 2027 and 7.5B in 2028 generating a 4B increase in annual FCF, assuming no growth at all in EPS. CHTR reported annual free cash flow of $3.318 billion in 2023, $3.161 billion in 2024, and $4.418 billion in 2025. With the winding down of the network upgrade 2027 FCF is estimated to reach approximately $6.1 billion, and rise $8 to $9 billion by 2027–2028.

The Cox transaction is expected to result in cost savings of 800mm and perhaps as much as 1B.

CHTR's growth prospects are poor and unlikely to change in the near future, but 8B in FCF will be put to use in some combination of share buybacks and open market bond purchases at less than face value. The stock is trading at 4x earnings with an equity FCF yield of almost 55%.

The pie in the sky chatter is that SPCX is looking to partner with CHTR to provide terrestrial infrastructure for Starlink. The emotional impact of a deal would exceed its economic impact but would provide a lift to the stock price. If Musk is serious about trying to compete in the connectivity space, he could consider making an offer for the whole of Charter. Musk could use inflated stock to pay for actual earnings which SPCX desperately needs, and he would be buying 8B of FCF and 95B of EV for something like 30B paid for by inflated stock.

Even in a slowly declining industry CHTR is undervalued by at least 50% .