Time Warner Cable Inc (NYSE:TWC) is the second largest cable operator after Comcast with nearly 12.5 million video subscribers. It is relatively geographically diverse, providing service in five geographic areas: New York State, the Carolinas, Ohio, California and Texas. Time Warner Cable Inc (NYSE:TWC) has simplified its business model and is a pure-play pay TV operator, with 85% of revenues coming from residential service with the majority of remaining revenue coming from Business service. The valuation of the company is not heavily discounted, but reasonable, with a TTM P/E ratio of 13.7x. Five-year earnings per share growth has been robust at 14.9% with an expected PEG ratio of 1.08. Operating margins have held steady over the past five years and revenue has grown at a modest 6% annually. Time Warner Cable Inc (NYSE:TWC) seems to be a reasonable investment, but does not stand out among peers.
DIRECTV is the second part of the satellite TV duopoly. When I first glanced over the stock my initial reaction was wondering whether or not anyone still uses their service. However, after researching the stock more thoroughly it became clear that my initial reaction was unwarranted. Consider these statistics: DIRECTV has averaged 11.5% revenue growth over the past five year period, along with 30.7% earnings per share growth. The latter has clearly been aided by the company’s repurchase program, which has reduced the number of shares outstanding by 52.5% over the previous ten-year period. DIRECTV (NASDAQ:DTV) currently has 20 million subscribers in the United States and 12 million more in Latin America, where the market is as of yet not completely saturated. It appears from this analysis that the company is undervalued with a PEG ratio of 0.71.
In the last quarter of the 2012 fiscal year, DIRECTV reported earnings per share of $1.41, exceeding the average analyst expectation of $1.128 by approximately 25%. Given this strong performance it seems that analysts would expect greater earnings for the 2013 fiscal year. However, the current consensus estimate is $4.81, only an 8% increase from the actual earnings of $4.44 reported in 2012. It should be noted that on average DIRECTV has repurchased about 6% of its float in each of the prior ten years. Even given robust revenue growth and recent performance, analysts still seem to underestimate the company. Given continuing revenue growth and share repurchases a target of at least 15% increased earnings for 2013 over 2012 seems reasonable, or $5.10 per share, meaning the company is trading for approximately 11x forward earnings and seems unlikely to disappoint in the next few quarters.
Below is a figure from the most recent annual report showing the cumulative subscriber growth, which continues to be robust. The business clearly seems to be booming, and DIRECTV’s strategy for growth in Latin America seems to be paying off handsomely. Yet the company still trades for a valuation that could nearly be described as distressed.
A final figure shows the price of the stock, along with price/sales, operating margin, revenue per share and shares outstanding. The price to sales most recently traded around its bottom valuation of the past ten years, and the stock has since broken out to new all-time highs. Valuation has expanded somewhat, but remains very reasonable historically. While DIRECTV does not pay a dividend, it has consistently repurchased shares at an average rate of 6% per year over the past ten years. Management has made its intention clear to continue to return cash flow to investors, and for those searching for long-term capital appreciation this is a very strong and tax-advantaged strategy. Revenue per share has grown dramatically and operating margin has been remarkably consistent even through the 2008 recession. There does not seem to be a hint of underperformance here.
In conclusion, DIRECTV is a very strong buy at the present price. The company is clearly over-discounted exactly because most investor’s reaction to the stock is one of skepticism. At 12.5x trailing earnings, it is clear that the market is not expecting too much from DIRECTV, and certainly not the historical earnings growth that the company has delivered. The company is a great, shareholder-friendly underdog and should continue to churn out market-beating performance precisely because no one is expecting it to.
In the time between when this article was written and its syndication, DIRECTV reported strong earnings exceeding analyst estimates and the stock spiked higher by nearly 7%. Often after such a strong surge a period of normalization will take place, and it would be unsurprising if the stock pulls back a bit or consolidates before moving higher again. Any weakness in the name should provide a good buying opportunity, and even given the recent run DIRECTV still appears to be a wonderful company at a very reasonable price.
The article The Future of Cable TV Probably Looks Like the Past: Five Cable TV Stocks to Consider originally appeared on Fool.com is written by Brendan O’Boyle.
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