Should You Be Long Time Warner Cable?
A possible Takeover Might Be Coming
The first company which comes to everyone's mind when thinking of cable consolidation is, undoubtedly, Comcast (CMCSA), the leader in the US cable industry which has been making efforts to consolidate the country's fragmented market.According to the press, the cable group could either make a “solo” move to take over its smaller rival – which is the country's second largest cable operator – or it could join forces with Charter (CHTR), the nation's fourth biggest cable operator supported by John Malone's Liberty Media (LMCA).
On the other hand, Cox could also be a suitable candidate to take over Time Warner Cable. Even though Cox is significantly smaller than Time Warner Cable – Cox is the country's third biggest cable operator – the company has a wonderfully strong balance sheet. Cox's net debt to EBITDA ratio stands at 2.7 times, compared with 3.2 times for Time Warner and 5.5 times for Charter.
I do not know which company will finally make a move to take over Time Warner Cable but it seems clear to me that consolidation is a clear strategy amid rising costs of TV programming and the need for higher investments.
Time Warner Cable's Valuation
Even when Time Warner Cable hasoutperformed the S&P 500 by 8% year to date, I believe there is still some room for continued outperformance. The company trades at 8 times 2014 EV/EBITDA and 17.2 times P/E while growing its earning per share (EPS) at a 19.86% year-over-year pace. While those metrics represent a small premium to its bigger competitor, the chances of any company taking over Comcast are significantly lower. Comcast sells for 7.5 times 2014 EV/EBITDA and 17 times P/E. On the other hand, Time Warner Cable's smaller competitors sell for a small premium to both Comcast and Time Warner Cable. For example Charter, trades at 8.4 times 2014 EV/EBITDA and 40 times P/E.
It seems a deal might be coming. It's tough to guess which company will finally make the move and acquire Time Warner Cable but all the necessary items to make a deal possible are now on the table. First of all, a deal that consolidates the U.S. cable market makes sense. Secondly, financing costs for Time Warner Cable's competitors still are at a historically low level. Finally, Time Warner Cable's valuation still looks attractive.
A few investors such as John Paulson have been buying shares in Time Warner Cable. As a matter of fact, Paulson & Co . – which is the hedge fund founded by John Paulson – has acquired up to four million shares of the cable company, which represents a 1.4% stake in the company. Other funds such as Glenview Capital Management and Highfields Capital Management have also taken significant stakes in U.S.'s second biggest cable operator. At the current valuation level, it might make sense to make a bet on Time Warner Cable's shares. While you wait you will be able to enjoy the company's growing 2% cash dividend yield.