Will Time Warner Cable Benefit from an Addition?

Time Warner

With shares of Time Warner Cable (NYSE:TWC) trading around $115, is TWC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Time Warner Cable is a provider of video, high-speed data, and voice services in the United States, with systems located in five geographic areas: New York state, the Carolinas, Ohio, Southern California, and Texas. The company offers its residential and business services customers video, high-speed data, and voice services over its broadband cable systems. With such a large and growing user base, look for Time Warner Cable to continue to see rising profits from its media, entertainment, and communications offerings.

Time Warner Cable is reportedly still in negotiations to acquire a stake in Hulu, even after Hulu’s owners — Comcast (NASDAQ:CMCSA), Disney (NYSE:DIS), and 21st Century Fox (NASDAQ:FOXA) — announced the site was no longer for sale. It is being reported that Time Warner Cable is interested in acquiring a 25 percent stake in the online television streaming service.

T = Technicals on the Stock Chart are Strong

Time Warner Cable’s stock has been on a powerful run higher over the last several years. The stock is now trading at all-time high prices, and looks poised to continue on this path. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Time Warner Cable is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

TWC

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Time Warner Cable options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Time Warner Cable Options

34.94%

63%

61%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is average demand from call buyers or sellers, and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts, and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and what that means for Time Warner Cable’s stock.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also help gauge investor sentiment on Time Warner Cable’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Time Warner Cable look like, and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

11.67%

-3.74%

140.70%

15.32%

Revenue Growth (Y-O-Y)

6.64%

9.85%

9.20%

9.30%

Earnings Reaction

-0.58%

-11.28%

-6.35%

2.73%

Time Warner Cable has seen increasing earnings and revenue figures over the last four quarters. From these numbers, it seems the markets have grown to expect a little more from Time Warner Cable’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Time Warner Cable stock done relative to its peers, Comcast (NASDAQ:CMCSA), DirecTV (NASDAQ:DTV), Dish Network (NASDAQ:DISH), and the overall sector?

Time Warner Cable

Comcast

DirecTV

Dish Network

Sector

Year-to-Date Return

19.32%

19.00%

31.02%

22.80%

21.54%

Time Warner Cable has been an average performer, year-to-date.

Conclusion

Time Warner Cable is a provider of entertainment, voice, and high-speed data services to a growing customer base around the nation. The company is still searching for strategic acquisitions in order to compete, and have shifted towards Hulu, the online video streaming service. The stock has been on a strong run over the last several years, which has taken it to all-time high prices. Over the last four quarters, earnings and revenue figures have been on the rise, but investors in the company have grown to a expect a little more. Relative to its peers and sector, Time Warner Cable has been an average year-to-date performer. Look for Time Warner Cable to continue to OUTPERFORM.

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