Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:
- The current price multiples
- The consistency of past earnings and cash flow
- How much growth we can expect
Let's see what those numbers can tell us about how cheap Time Warner Cable
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
Time Warner Cable has a P/E ratio of 17.8 and an EV/FCF ratio of 13.8 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Time Warner Cable has a negative P/E ratio and a 5-year EV/FCF ratio of 20.3.
A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.
Time Warner Cable is 0 for 4 on hitting the ideal targets, but let's see how it compares against some competitors and industry mates.
|
Company |
1-Year P/E |
1-Year EV/FCF |
5-Year P/E |
5-Year EV/FCF |
|---|---|---|---|---|
|
Time Warner Cable |
17.8 |
13.8 |
NM |
20.3 |
|
Comcast |
14.7 |
11.5 |
20.0 |
16.4 |
|
DIRECTV |
25.8 |
14.5 |
27.8 |
24.7 |
|
Dish Network |
11.5 |
10.2 |
11.5 |
10.2 |
Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.
Numerically, we've seen how Time Warner Cable's valuation rates on both an absolute and relative basis. Next, let's examine...
The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, Time Warner Cable's net income margin has ranged from -42% to 13.5%. In that same time frame, unlevered free cash flow margin has ranged from 10.6% to 16.3%.
How do those figures compare with those of the company's peers? See for yourself:
Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.
Additionally, over the past five years, Time Warner Cable has tallied up four years of positive earnings and five years of positive free cash flow.
Next, let's figure out...
How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. In that time period, Time Warner Cable has put up past EPS growth rates that aren't meaningful due to losses. Meanwhile, Wall Street's analysts expect future growth rates of 13.1%.
Here's how Time Warner Cable compares to its peers for trailing five-year growth (neither Time Warner nor DIRECTV have meaningful growth rates):
Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:
Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.
The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Time Warner Cable are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 17.8 P/E ratio.
Purely by the numbers, Dish Network and Comcast are more attractive than Time Warner Cable. In fact, Dish caught my eye while I was trolling the 52-week low list.
If you find any of these numbers compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.
Interested in reading more about these stocks? Add them to My Watchlist to find all of our Foolish analysis on this stock.
