Why Charter Communications Plunged in September

Shares of Charter Communications (NASDAQ: CHTR) plunged 27.3% in September, according to data from S&P Global Market Intelligence.

Charter had another difficult month, as long-term interest rates leaped higher, marking a significant increase relative to before the summer. That's a big problem, as Charter remains heavily indebted.

Additionally, Charter saw a sell-side analyst downgrade during the month, with the analyst flagging ongoing competitive headwinds for the operating business.

The combination of higher rates and increased competition sent Charter's stock down to 10-year lows.

A rocky start to Fall for Charter and telecom stocks

A big factor in Charter's September decline was the rapid rise in long-term interest rates, which happened over the summer and picked up steam last month. The yield on the 10-year Treasury bond climbed from around 4.75% at the end of August to 5.30% at the end of September. This compares to a 4% yield as recently as March.

This is a problem for Charter and many telecom stocks, given their very high debt loads. Charter has a whopping $94 billion in debt, amassed over many years during which it engaged in aggressive share repurchases rather than deleveraging.

In past years, Charter believed its broadband network had a strong moat, given the capital intensity of burying broadband lines across a large footprint. However, competition from wireless companies has intensified in recent years, negatively affecting Charter's revenue and profitability. Last quarter, Charter saw a 1.7% revenue decline, while adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) declined 4.3%.

Those competitive fears are now being augmented following the IPO of Space Exploration Technologies (NASDAQ: SPCX), which runs the Starlink satellite-based broadband service. On Sept. 14, Wolfe Research analyst Peter Supino downgraded Charter stock from Equal Weight to Underweight, while lowering his price target to $118.

Supino flagged Starlink's growing technological capabilities as a threat to traditional terrestrial broadband networks, noting that Charter's footprint skews more rural and offers lower speeds. Given that satellite broadband is more competitive in these areas, Charter may encounter greater competition and pricing pressure than its peers.

Image source: Getty Images.

Charter may be a value trap

Charter stock looks incredibly cheap here at these levels. Its market cap of around $14.3 billion is actually below its trailing 12-month adjusted EBITDA of $22.3 billion.

While that seems like a terrific deep-value opportunity, Charter's $94 billion in debt and declining revenue certainly complicate the picture.

If Charter can even eventually stabilize its revenue and profitability, the stock could have significant upside. However, a potential bankruptcy is also on the table, due to the company's high debt load. The stock remains a high-risk, high-upside play, appropriate only for those willing to lose their entire investment.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.