Painting is by my father, Naum Katsenelson. Prints available on Katsenelson.com.

I'm back from a ten-day Japan trip. I went with my son Jonah and my friend Ben. Someone asked me why I went, and my reply was that three Vitaliys went – the investor (we met with ten companies), the writer (I'm working on a long essay about Japan), and a tourist. I'd never been to Japan before. 

Actually, I guess four Vitaliy's went to Japan, the fourth one being Vitaliy the father. Jonah is 23. He graduated from CU Boulder and is in the process of figuring out what he's going to do next. I didn't know when we'd have another opportunity to spend ten days together, just the two of us. In all honesty, that was probably the most important part of the trip.

I'm going to take a break from traveling for about a month. Then, at the end of October, I'm going to a small investment conference in Richmond, VA. It's my fourth year attending. Last year when I was there, I combined the visit with speaking to the CFA Society of Virginia (you can listen to it here). 

My family will be spending Thanksgiving in Mexico (the Riviera Maya area). Then they'll go home, and I'll fly from Mexico to NYC to attend another small private investment conference I've been going to since 2008. I’ll be joined by my brother Alex. I love NYC during Christmas. Last year Alex and I spent a full day just walking the streets of Manhattan.

Today, I'm going to share an excerpt from my fall letter to clients. I'll discuss Charter Communications (CHTR) and Liberty Broadband, the vehicle through which we own Charter. 

Charter has been a tumultuous investment. I rarely buy a stock that goes straight up. Charter has been rewarding in at least one way (so far): I have learned a lot about the broadband industry. You learn very differently when you have skin in the game. 

As American philosopher Mike Tyson said, "Everyone has a plan until they get punched in the mouth." I've been punched in the mouth a lot with Charter. If you're new to my Charter journey, you can read my previous essay about it here. Also, At the end of the essay, I discuss a very important topic: what creating shareholder value really means. You can read this article in Spanish here or Russian here.

The Infinite Game in Telecom

Charter, just like Comcast, showed only a very slight decline in broadband customers in the quarter. Most of the decline came from the US government removing subsidies for rural customers. Overall, the business is doing very well.

I want to remind you that broadband is not a secular-challenged business, but an advantaged business that we believe will resume growth soon. Cable companies continue to offer a great product on the market, which is actually improving in quality as I type this because they are upgrading their networks to be as fast as fiber. They should be done with their full network upgrade in a year or so.

Also, cable companies have shown that they are very good at attracting wireless customers from wireless carriers (they have grown their wireless business by 25% in 2024). The more we analyzed this industry. the more bearish we became on AT&T and Verizon.

Though owning cable stocks has not been rewarding (I'm being very gentle to myself), the more research we've done into the industry, the more convinced we’ve become that once the dust settles, their market share will not decrease but likely increase. Fixed wireless has taken all the share it will take and will start donating share to cable companies as customers get frustrated with intermittency of the service and usage caps.

The industry is moving towards the bundle – one bill for broadband and wireless (and maybe TV service, though that has been marginalized by streamers). It's a lot easier for cable companies to add wireless customers than for wireless companies to add wired broadband customers. This point is paramount.

It costs very little for a cable company to add a wireless subscriber, as 80-90% of a subscriber's data is traveling on Wi-Fi (i.e., the cable network is already there). 

Meanwhile, the cost of building out broadband is pushing into uneconomical territory, for several reasons. First of all, all the low-hanging fruit has already been picked. It costs, let's say, $50-100 thousand dollars to lay a mile of fiber, whether that covers one or a thousand homes. High-density areas already have cable or fiber service. With the latest upgrades the cable industry is doing, both their upload and download speeds are on par with fiber. Second, labor costs have gone up significantly over the last few years.

Verizon recently announced buying Frontier Communications for $20 billion. Frontier has 2.2 million fiber subscribers. With this purchase, Verizon is paying $9,000 per fiber subscriber. Let's examine the economics of this transaction:

Frontier gets about $800 a year of revenues from these broadband customers (on a par with Charter and Comcast). Let's say they achieve a 23% margin (Frontier is barely a profitable business, so I'm using Charter's margins). Thus, each customer will generate $184 of profit for them. So Verizon is paying $9,000 for $184 of profit, and it will take Verizon 49 years to break even on this transaction. 

As you can see, these economics make no sense. Verizon and AT&T are horrible at capital allocation, and this deal is a sign of supreme desperation. The market has been slow to see what we see in Charter and Comcast, and this is always our goal – we want the market to agree with us, later. 

Our very conservative estimate of Charter’s 2028 free cash flow per share is $48-60. In this estimate we are assuming no customer growth in broadband and 2% price increases a year. At 13-15 times free cash flows, we get a price of around $630-900 in 2028. Charter is trading at about $320 as I write this. 

We really like Charter's management. We heard an anecdote about Charter CEO Chris Winfrey that warmed our soul. A week after he became CEO, Charter announced a huge, multibillion-dollar upgrade for its broadband network. This news sent the stock down 15% (I wrote about it; we thought it was a great idea).

Anyway, someone met Chris at a party and told him, "That’s the right move, but very gutsy." Chris said, "We build the company for our grandchildren." This is what we want to see from our CEOs. They're willing to sacrifice short-term profitability to improve the business's moat.

Often, the idea of "creating shareholder value" is misunderstood. Paying employees poorly, abusing suppliers, and trying to rip off your customers is not going to create long-term (key term) shareholder value. It may bring short-term profits and boost the stock price, but it shortens the company's growth runway and erodes its moat.

I don't want to get off topic, but I've been thinking a lot about this. We've spent a lot of time studying the aircraft industry; our focus was Airbus, and thus we spent a lot of time looking at Boeing.

Boeing, under previous management, focused on "shareholder value creation." It cut costs, laid off a lot of workers, including many quality control folks. Its "shareholder value creation" didn't stop there; it misled regulators and took shortcuts in safety. Specifically, Boeing made critical design changes to its 737 MAX aircraft without fully informing regulators or pilots, and pushed for reduced pilot training requirements to save costs. These decisions directly contributed to two fatal crashes in 2018 and 2019, resulting in 346 deaths and the worldwide grounding of the 737 MAX for nearly two years.

Did its management actions maximize shareholder value? Well, it depends on the timeframe. It boosted short-term earnings and drove the stock price higher. It may have made its CEO rich beyond belief.

But, over a longer timeframe, these decisions have destroyed shareholder value. People used to say, "If it's not Boeing, I'm not going." Today, I become slightly more religious when I board a Boeing plane. The company has incurred over $20 billion in direct costs related to the 737 MAX crisis, including compensation to airlines and families of crash victims, and increased production costs. 

This doesn't account for the incalculable damage to Boeing's reputation and loss of market share. It gave Airbus an opening to produce more planes and take market share, with Airbus surpassing Boeing in deliveries and orders in recent years, particularly in the crucial narrow-body market.

We want to own companies that aim to maximize long-term shareholder value by treating all their stakeholders fairly. We want our companies to play the infinite game. What does "fairly" mean in this context? I’ll borrow from US Supreme Court Justice Potter Stewart, who famously dodged defining pornography by saying, "I know it when I see it."

Update: After I wrote the above, Charter proposed to buy Liberty through a merger. We don't own Charter directly, but rather through Liberty Broadband, which holds a 25% stake in Charter. Liberty was trading at a significant discount (around 30%) to the value of its Charter shares.

Liberty agreed, but at a higher price. Our estimate of Liberty's net asset value is about $88. The shares are trading at $75 as of this writing (up from $60). If the deal goes through we'll end up owning shares of Charter at a significant discount.

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