Can Time Warner Cable Break Out of Its Range?

With shares of Time Warner Cable (NYSE:TWC) trading around $134, 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, the Carolinas, Ohio, Southern California, and Texas. The company offers its residential and business services customers numerous 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.

Charter Communications (NASDAQ:CHTR) has 13 nominees to replace the entire Time Warner Cable board. It’s a bold move, and it highlights that Charter is willing to push Time Warner Cable hard for a deal. Because of the way the company has put forth its defense, however, there may be little room for Time Warner Cable to negotiate with Charter. Get ready for a long, drawn-out proxy contest. Time Warner Cable’s defense is  that Charter is trying to underpay for the company. But the defense is also based on a legal point. Even if Charter elects all 13 directors, it still does not mean that Time Warner Cable will be sold to Charter.

T = Technicals on the Stock Chart Are Strong

Time Warner Cable stock has been coasting higher over the past several years. The stock is currently trading sideways and may need time to stabilize before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? 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 signals 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

16.6%

0%

0%

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

Put IV Skew

Call IV Skew

March Options

Flat

Average

April Options

Flat

Average

As of Wednesday, 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 small 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 the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

12.5%

-29.23%

14.69%

11.67%

Revenue Growth (Y-O-Y)

1.68%

2.89%

2.7%

6.64%

Earnings Reaction

1.58%

2.79%

3.16%

-0.58%

Time Warner Cable has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about 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), Dish Network (NASDAQ:DISH), and DirecTV (NASDAQ:DTV) — and sector?

Time Warner Cable

Comcast

Dish Network

DirecTV

Sector

Year-to-Date Return

-0.53%

6.12%

-1.04%

3.07%

2.9%

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

Conclusion

Time Warner Cable provides entertainment, voice, and high-speed data services to a growing customer base in the United States. Charter is willing to push Time Warner Cable hard for a deal. The stock has been moving higher over the past several years but is currently trading sideways. Over the last four quarters, earnings and revenues have been on the rise. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Time Warner Cable has been an average year-to-date performer. Look for Time Warner Cable to OUTPERFORM.

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