So let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity for too many hedge fund managers that bought the stock in the past quarter.
The Second Largest Cable Operator
Time Warner Cable is a provider of video, data and voice services, with cable systems located mainly in five geographic areas: New York State, the Carolinas, the Midwest, Southern California and Texas.
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- TWC 15-Year Financial Data
- The intrinsic value of TWC
- Peter Lynch Chart of TWC
Time Warner faces intense competition in all markets from other providers of pay-TV, high-speed Internet and phone services. As a matter of fact, the firm has readapted its strategy trying to rebrand itself as a major broadband service provider for residential customers. In addition to this, it plans to aggressively penetrate the commercial business segment, as well as reaching changes in marketing strategy.
The company has developed a strategy dealing with purchasing and/or joining with other companies. In 2011, it acquired NewWave Communications, a smaller cable operator serving customers in Kentucky and Tennessee. Also, it acquired Navisite, a provider of enterprise-class, cloud-enabled hosting, managed applications and services. Moreover, it reached a deal with Los Angeles Lakers to launch two regional sports TV networks. In February 2012, it acquired Insight Communications, a U.S. cable operator, serving customers in the Western U.S. The deal was settled at $3 billion in cash. Last year, the firm agreed to acquire DukeNet Communications, a regional fiber optic network company, in a $600 million cash deal which is expected to be ready this quarter.
In terms of valuation, the stock sells at a trailing P/E of 20.8x, trading at a premium compared to an average of 16.4x for the industry. To use another metric, its price-to-book ratio of 5.66x indicates a premium versus the industry average of 2.16x and the price-to-sales ratio of 1.84x is above the industry average of 1.42x. The metrics indicate that the stock is relatively overvalued relative to its peers.
Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago ($1.89 versus $1.68). We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last five years and beating the S&P 500 by far.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. With a ROE of 28.6% is well above the industry mean of 11.60% and competitors such as AMC Entertainment Holdings Inc. (NYSE:AMC) and Cablevision Systems Corp. (NYSE:CVC). But for investors looking for a huge ROE, DISH Network Corp (NASDAQ:DISH) is an appropriate option with a ratio of 82.64%.
Time Warner's revenue growth was positive and I expect this trend to continue as well as the earnings per share improvement registered in the last quarter. The stock price increased by almost 59% over the past year, which is really good for investors seeking capital appreciation.
I would recommend investors to consider adding the stock for their long-term portfolios. The firm currently has a Zacks Rank #3 (Hold) and upgraded their long-term recommendation from Neutral to Outperform. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like George Soros (Trades, Portfolio), Chris Davis (Trades, Portfolio), Richard Perry (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) have taken long positions in the stock.
Disclosure: Victor Selva holds no position in any stocks mentioned.