Barclays Hikes Charter, Time Warner Cable Targets

• Amid a broader decline in the stock market this week, shares of Charter Communications, Inc. CHTR and Time Warner Cable Inc TWC inched up, albeit marginally.
• Barclays’ Kannan Venkateshwar reiterated Equal-Weight ratings on both the companies, while raising the price targets.
• Charter’s operating leverage in the last quarter served as proof that the company could drive earnings growth after its pending mergers with Time Warner Cable and Bright House Networks, Venkateshwar said.

Analyst Kannan Venkateshwar mentioned that the view on Charter Communications had been cautious, since operating leverage had “taken a while” to set in despite several years of investment. “Last quarter was the first in which we saw meaningful operating leverage which we believe is sustainable going forward.”

Venkateshwar added that the operating leverage gave confidence in Charter's ability to generate earnings growth following its pending transactions with Time Warner Cable and Bright House Networks. “Also, competitive dynamics are starting to move in favor of the cable industry despite concerns on cord cutting as demonstrated by DISH, DTV and telco results last quarter.”

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Charter has guided to synergies of $800 million for the merger, which appears “conservative,” the analyst commented, estimating total cost synergies closer to about $1 billion. This would be driven by lower programming costs, SG&A and better efficiencies with customer service and technical operations.

Venkateshwar also believes that the company may be able to achieve greater margin expansion that reflected by its long-term margin guidance of ~40 percent, up from the present ~35 percent. Charter’s margin profile may be similar to that of Comcast, the Barclays report said.

Venkateshwar raised the price target for Charter from $157 to $204, stating the reasons as “1) a $213 post-transaction price based on an EV/2018E pro forma EBITDA multiple of 6.5x, 2) a $157 no-deal price based on a 2016 multiple of 7.9x, and 3) a deal probability of 85%, roughly in line with the market.”

The price target for Time Warner Cable was raised from $166 to $206 based on the price target for Charter, given the mix of stock and cash in the deal.