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Charter Shares Dip Nearly 5%

Charter Communications shares dropped 4.7% ($7.54 per share) to $154.23 each in early afternoon trading Thursday, after the Stamford, Conn.-based cable operator reported strong Q2 results but offered more detail in its upcoming systems transactions with Comcast that some investors may have interpreted as slowing overall growth.

Charter reported revenue of $2.3 billion (up 7.3%) and adjusted cash flow of $795 million, up 7.9%. Basic video customer losses improved to 29,000 in the period (compared to a loss of 55,000 last year) and high-speed Internet subscriber additions grew by 49,000 (compared to 38,000 in 2013). But backing out one-time charges, cash flow growth would have grown just under 6%, missing analysts’ consensus estimates of 8% growth.

That miss, coupled with the possibility that its pending deals with Comcast could slow overall growth, sent the stock southward. It finished the day at $154.52 per share, for a drop of $7.25 each, or 4.5%

Charter agreed in April to a series of transactions that will take place after Comcast’s $69 billion merger with Time Warner cable is complete. They include the purchase of about 1.4 million subscribers from TWC and swaps involving about 1.6 million customers with both Comcast and TWC. Charter also will obtain a 33% interest in SpinCo, a separate publicly traded company that will include about 2.5 million customers from Comcast and TWC.

On a conference call with analysts, Charter chief financial officer Christopher Winfrey explained that the acquired TWC systems – which are in Ohio, Indiana, Kentucky, Wisconsin and Alabama  -- would grow at a 6% to 7% annual rate, or about the same as its existing systems grew between 2012 and 2014.

That, according to some analysts, was enough to make investors believe that Charter’s growth engine will slow.

“The stock was priced for perfection after material appreciation,” said Telsey Group media analyst Tom Eagan. “The street may have wanted more.”

 Charter has been a top pick of analysts mainly because its low penetration rates present a tremendous growth opportunity. Under CEO Tom Rutledge’s tutelage, the company has revamped its product offerings and pricing, boosting minimum Internet speeds and embarking on an all-digital initiative that it expects to complete by the end of the year.

“Charter’s second quarter results are fine… but they are a reminder of the many moving parts in the Charter story,” wrote MoffettNathanson principal and senior analyst Craig Moffett in a note to clients. “And the story will only get more complicated as Charter’s transactions with Comcast and SpinCo close.”

While Rutledge didn’t reveal what most analysts wanted to hear about SpinCo on the call – whether the separate publicly traded company would be able to piggy back on Charter’s existing programming contracts – he did say all of the transactions will tighten Charter’s clusters and give it the ability to market its services to a wider audience. He said currently Charter can mass market, through print, radio and television ads, to only about 48% of its footprint. With the Comcast-TWC deals, that ability expands to 95% of its footprint.