MPE Capital, an investment management firm, published its second-quarter 2022 investor letter – a copy of which can be downloaded here. The last twelve months have been a period of both tremendous pain and tremendous growth for the fund. For the first half of 2022, MPE Capital declined 33.1% while the S&P 500 TR declined 20.0%. Go over the fund’s top 5 positions to have a glimpse of its finest picks for 2022.
In its Q2 2022 investor letter, MPE Capital mentioned Altice USA, Inc. (NYSE:ATUS) and explained its insights for the company. Founded in 2015, Altice USA, Inc. (NYSE:ATUS) is a Long Island City, New York-based cable television company with a $4.6 billion market capitalization. Altice USA, Inc. (NYSE:ATUS) delivered a -37.39% return since the beginning of the year, while its 12-month returns are down by -64.09%. The stock closed at $10.13 per share on August 26, 2022.
Here is what MPE Capital has to say about Altice USA, Inc. (NYSE:ATUS) in its Q2 2022 investor letter:
“Two (very) costly mistakes I’ve made over the last twelve months have been my investments in Altice USA and Poshmark. Both are down over 50% from my initial purchase price. I not only poorly appraised business quality, I also incorrectly appraised the intrinsic value of both of these companies. It should rarely end up the case that we pay over intrinsic value, at worst case we should never lose money on an investment. I will dive into one of these mistakes below and maybe dive into the other in a future letter. My thinking when buying Altice USA was that they operate as a duopoly in their main footprint, the New York Tri-State area. They provide a needs-based service: internet, video, and voice services. I figured this is a very stable business with high barriers to entry. Management seemed competent as well based on historical capital allocation decisions. I didn’t fully appreciate at the time how poorly positioned they were relative to Verizon Fios, as well as how fiercely competitive the business can get on promotions and customer acquisition.
Altice offers hybrid fiber coaxial (HFC) while Fios offers fiber-to-the-home (FTTH). FTTH is a far superior product, which has led to some share loss to Fios in the parts of their footprint that overlap. There have also been some subscriber losses in their other footprint due to new cable entrants and fixed wireless offerings.
My original thinking was that the video business will go to zero overtime due to continued pressure from services like Netflix. In hindsight, I overstated their free cash flows excluding the video business due to difficulties disaggregating their business results. This FCF delta is a huge contributor to the difference between my current and original estimates of intrinsic value. Now, it’s possible that the video business doesn’t go to zero; however, I have a hard time envisioning that many households in ten years will still subscribe to linear television.
After losing some subscribers and facing some headwinds, they are now reinvesting many billions over the next few years in order to fiberize the majority of their footprint. I think this is a great plan and it will hopefully cement their position as a true duopoly in the New York TriState area. However, in their other major footprint, new fiber entrants are coming in and competition will only intensify. There are also some new entrants entering this space like Starlink satellite internet and fixed wireless internet from tier one mobile carriers. I think these will generally be more expensive and inferior to FTTH; however, they may end up putting some pricing pressure on Altice overtime.”
Photo by Jonas Leupe on Unsplash
Our calculations show that Altice USA, Inc. (NYSE:ATUS) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Altice USA, Inc. (NYSE:ATUS) was in 35 hedge fund portfolios at the end of the second quarter of 2022, compared to 40 funds in the previous quarter. Altice USA, Inc. (NYSE:ATUS) delivered a -12.82% return in the past 3 months.
In April 2022, we also shared another hedge fund’s views on Altice USA, Inc. (NYSE:ATUS) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q2 page.
Disclosure: None. This article is originally published at Insider Monkey.
