24/7 Insights:

• Warren Buffett’s Berkshire Hathaway stock holdings have a market value of $370.8 billion dollars.
• Charter Communications (NASDAQ: CHTR) has found its way into Buffett’s portfolio, with his stake currently worth around $1.1 billion.
• Analysts project the stock could have around 20% upside over the next 12 months. 

Charter Communications (NASDAQ: CHTR) is exactly the kind of stock investors would think Warren Buffett would be all over. And he is. 

According to the most recent data from the Warren Buffett portfolio tracker, Charter Communications makes up a 0.3% portfolio weighting for Buffett, with the Oracle of Omaha owning around 2.7% of all outstanding Charter Communications shares. 

Now, this is a stock that’s down considerably from its previous 2021 peak. And it’s far from a high-growth tech stock one might assume is the case via this price action. From a peak of nearly $820 per share, CHTR stock has declined to less than $300 per share today. So, one has to wonder whether Buffett’s purchase in 2016 suggests analysts could be right one their assessment of this stock as an undervalued gem worth buying.

Let’s dive into that idea.

Why Is Buffett Bullish on Charter? 

Warren Buffett initially bought Charter Communications stock in 2016 at around $222 per share. He has consistently trimmed his position as the stock surged, with his total shares owned dropping from his initial buy of more than 9.3 million shares to around 3.8 million shares today. Accordingly, one could take the view that Mr. Buffett isn’t bullish on this stock at all anymore, and may be looking to continue to trim on any surges in the future. 

When one has the benefit of a low base in a given stock, it’s possible to enact such a strategy. And with Buffett’s recent shift toward higher growth in certain pockets of his portfolio, there are certainly plenty of enticing options out there right now that may be more deserving of his capital. As such, it’s unclear whether current levels are attractive for Mr. Buffett, and if his views align with that of analysts, who think the stock is roughly 20% undervalued. 

Why Are Analysts Pricing In 20% Upside to Charter?

For Buffett, Charter’s core business model as a key internet, telephone and communications provider coincides with many of his other investments. Yes, Charter operates in a capital-intensive industry. But via his previous large investments in railroads and other similar capital-heavy industrial stocks, it’s clear Mr. Buffett cares more about long-term cash flow generation and dividend income than other fundamental factors other investors are increasingly concerned about.

For Charter, its biggest knock has been the company’s debt load, which sits around $97.6 billion at the time of writing. And with only $661 million in cash and cash-like investments on hand, that’s a recipe for ongoing bond issuances, something that could become more difficult in this higher rate environment. 

Charter’s insistence on repurchasing shares is something that Buffett may have been endeared to in the past. But with a debt load like this, it’s more likely that the Oracle (and most investors out there) would like to see more progress on the company’s balance sheet stabilization progress, which will include debt pay down over time.

I think analysts are looking at this stock as one that provides a robust return on equity, and a company that generates the cash flows to manage its cash flows. While I wouldn’t personally be buying this stock due to some key balance sheet overhangs, there’s a reason why Buffett bought this stock in the first place. And whether he continues trimming or not, having the Oracle’s stamp of approval is usually a great thing for any company.

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