The S&P 500‘s having a decent year. So some investors might think due to the index’s exposure to AI and other tech stocks, there aren’t many good value stocks. That just isn’t true, and some potential bargains remain. So is the stock with the lowest price-to-earnings (P/E) ratio worth considering?

The share price tumble

I’m talking about Charter Communications (NASDAQ:CHTR). The stock’s fallen 57% over the past year and trades on a P/E ratio of just 2.8.

To begin with, there’s clearly a good reason investors are giving the company such a low valuation. Charter’s one of America’s largest telecommunications companies, operating primarily under the Spectrum brand. It provides everything from broadband internet right through to cable television. The business generates revenue mainly through recurring monthly subscriptions, which should theoretically provide predictable cash flows.

The problem is that its core broadband business is struggling. In Q2, Charter lost 172,000 internet customers, compared with 116,000 in the same period last year. Revenue declined 1.7% year-over-year to $13.5bn, while adjusted EBITDA fell 4.3%.

Competition’s a major issue. Traditional cable broadband providers are increasingly losing customers to fibre networks and fixed wireless services offered by other companies.

Another concern is debt. At the end of June, Charter had around $94bn in outstanding debt principal. That’s enormous relative to its equity market valuation. Higher interest rates make refinancing more expensive, while declining earnings could make the debt burden increasingly difficult to manage.

This helps explain why the P/E ratio’s so low, because of the share price fall.

Undervalued potential

Charter’s mobile business continues to expand, adding 406,000 lines during the second quarter. The company now serves around 12.5m mobile lines, providing an opportunity to offset some of the weakness in broadband.

It’s also investing heavily in upgrading its network, with capital expenditure expected to reach $11.4bn this year. These improvements should help it compete more effectively with fibre providers.

For me, another big factor when it comes to hunting for fallen gems is whether the business is still profitable. Importantly, Charter is. Second-quarter net income reached $1.3bn, while free cash flow totalled $969m. That’s good because it shows me the company’s core operations are still working, and it could suggest the difficulties it faces are more short term.

The bottom line

As every investor knows, the P/E ratio doesn’t tell the whole story. Heavy debt, significant capital expenditure and structural competition make Charter considerably riskier than a normal value stock. So even though I think there’s a recovery opportunity here, it’s a bit too high-risk for my liking. On that basis, I’m not going to buy, but investors who have a higher risk tolerance may want to consider it.

Should you invest £5,000 in Charter Communications right now?

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Jon Smith has no positions in the shares mentioned.