UK Edition
Which is more glamorous: Netflix or a telecoms company whose cables deliver it to subscribers’ homes? Few would opt for the latter, Questor suspects. But which is more profitable?
Let’s answer the question by looking at an example. Charter Communications is an American broadband company that used to be a cable TV provider, so it was a sort of the Netflix of its day. Charter does still offer cable TV but the provision of broadband now dominates the business.
Here’s what Ben Goldsmith, whose Menhaden investment trust has about a fifth of its money in Charter, had to say about the effect of this shift of emphasis on the firm’s profitability: “Despite its history as a cable TV provider, Charter now earns the vast majority of its profits from supplying high-speed broadband.
“This is a higher-margin and less capital-intensive activity than the cable TV business, which has been hurt by competition from streaming services and the surging cost of content.” The latter has held back attempts by Netflix and others to make profits commensurate with their share prices.
Mr Goldsmith said the pandemic had only strengthened the case for Charter in its new guise as an essential utility. “Our ability to carry out everyday tasks, to work and to have fun over the internet has enabled life to continue in a much more ‘normal’ manner than would have been possible even a decade ago,” he said.
“We think our lives can only become more and more digital. Reliable high-speed internet connections are a prerequisite so we view Charter’s network, covering more than 50m households or about 40pc of all American homes, as critical, enabling infrastructure in a world of increasingly seamless connectivity.”
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He said growth in data consumption of more than 30pc a year should underpin the importance of fixed-line as opposed to wireless broadband connections, which “struggle to deliver comparable capacity”.
Mr Goldsmith added that many households in America had few alternatives to cable broadband, and that previous industry consolidation had benefited the group’s competitive position in various areas. The cost of building new fibre optic networks from scratch was “prohibitive”, he said, so new entrants had struggled.
He said Charter should be able to continue to add new broadband subscribers at a rate of about 5pc annually over the coming years “in nearly any economic climate” through a combination of growth in the number of households, increasing broadband penetration and “market share gains via the supply of a superior service – speed and data capacity – at a competitive price”.
That “foundation” of a steadily growing, high-margin base of broadband subscribers, paired with falling costs to serve them, lower customer turnover and lower capital intensity as the old cable TV boxes were no longer needed “should all help to drive material growth in free cash flow”, Mr Goldsmith concluded.
There are few better signs of a truly profitable business in our view.
Questor says: buy
Ticker: Nasdaq: CHTR
Share price at 6pm: $606.65
Update: Hargreaves Lansdown
We always felt that Hargreaves’ reputation for good service and the loyalty of its customers would prove equal to the damage done by its association with Neil Woodford, and events seem to have confirmed our view.
The firm now has 1.4m customers, a rise of 188,000 over the past year, according to annual results published earlier this month. Clients’ assets rose in value by 5pc to £104bn.
Sales increased by 15pc to £551m and profits before tax by 24pc to £378m.
The stock yields 3.3pc, if we take into account the special dividend that the firm declared, which is good for a fast-growing company. Hold.
Questor says: hold
Ticker: HL.
Share price at close: £16.59
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