While I admit to being tempted by the stock’s low price-to-free cash flow valuation, I’m going to need to see an uptick in bookings before I can call this one a buy.
Time to tune in to Time Warner Cable?
Possibly the most interesting story in today’s news, however, is the one going on over at Time Warner Cable Inc (NYSE:TWC) –currently embroiled in a dispute with broadcaster CBS Corporation (NYSE:CBS). Yesterday, we learned that Time Warner Cable Inc (NYSE:TWC) has offered to return CBS to its lineup if, for example, CBS Corporation (NYSE:CBS) would agree to permit Time Warner Cable Inc (NYSE:TWC) to market its channel a la carte. CBS isn’t thrilled with the idea, characterizing it as a “sham” proposal — but at least one analyst is impressed.
This morning, analysts at Argus Research announced they are raising their price target on Time Warner by more than 10%, to $130. Argus already rates the stock a “buy” — the question is, why?
CBS Corporation (NYSE:CBS) wants pricing concessions from Time Warner Cable Inc (NYSE:TWC), which would hurt the latter’s profitability. But even in the best case — a continuation of the status quo ante — Time Warner’s valuation just doesn’t look that attractive. The stock costs about 15.6 times earnings. Its free cash flow, while strong, is not significantly greater than reported GAAP earnings. These prices are simply too high to justify for a stock that analysts doubt will grow faster than 11% annually over the next five years, and that pays a dividend yield of only 2.2%.
Long story short, I see Time Warner Cable Inc (NYSE:TWC) as overvalued if it wins this dispute with CBS, and significantly more overvalued if it loses. (Side note: At more than 20 times earnings, and with a growth rate barely reaching 12%, CBS is no great bargain either.)
The article Tuesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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