(UNKNOWN:TWC.DL) With strong growth in customer acquisition, industry leading technology, and a planned merger with Comcast Corp. (NASDAQ:CMCSA) that could create an industry leading company, Time Warner Cable (UNKNOWN:TWC.DL) looks like it will have an exciting future. But is the price right to make this stock a buy now?
Better technology and more subscribers
Before discussing the potential merger with Comcast, let's be clear that Time Warner Cable looks like a pretty good option all on it's own. In the company's most recent reported quarter, adjusted earnings per share increased 11.8% year over year. While this was just below expectations, the company has many reasons to believe that this number can go up even more in the quarters to come. Time Warner Cable's 11.415 million residential high-speed data subscribers grew Q2 revenues to over $1.6 billion, up 12% year over year.
Time Warner Cable has already added 340,000 new Internet customers for the year through Q2. With the momentum built so far this year, Q3 and Q4 could be another exciting increase in the subscriber base, especially with the roll-out of the company's new Time Warner Cable Maxx, a broadband service that provides data speeds of up to 300 megabits a second. While the company only phased the product into select test markets to start, the company has been preparing to release the product to at least seven more markets in the second half of 2014 and into 2015, making it available to another 6 million or more customers in the coming months. The new technology could be creating a lot of buzz soon that will help to increase subscriber rates further.
More subscribers will mean more earnings in the quarters to come, especially as increasing average revenue per user, or ARPU, drives up revenues and margins further. Monthly ARPU in residential high-speed data increased 9.7% to $46.92 in Q2, and expect that to go higher in Q3 as the company has continued to implement cost efficiencies to drive that number higher.
Time Warner Cable is a value in this industry
While technology development and growing subscribers are two reasons to believe the company is continuing strong operations to grow earnings in the quarters to come, what about the company's current valuation? At a P/E of 19, well below the industry average P/E of 31, Time Warner Cable also looks like a good value right now.
Compared to a competitor like Dish Network (NASDAQ:DISH), Time Warner Cable looks even better. Both Time Warner Cable and Comcast are trading at about 19 times earnings. However Dish stock is trading above 29 times earnings. Furthermore, the expected P/E by 2015 year end for Time Warner Cable is just 17 times, where as the same expectation is over 33 times for Dish. Finally, Time Warner Cable beats out Dish with higher profit margins, lower debt to equity, and better quarterly earnings growth.
What to expect with the coming Comcast merger
Time Warner Cable and Comcast have entered into a definitive merger agreement to combine under the Comcast name. If and when the merger completes, all shares of Time Warner Cable will then be converted to shares of CMCSA. At that time, each share of Time Warner Cable will converted for 2.875 shares of CMCSA, which at current prices values Time Warner Cable stock at about $153 per share. Given the current Time Warner Cable price around $143, that would mean an immediate 7% increase.
Like Time Warner Cable, Comcast also looks to be a strong company on it's own. Together, the companies could be even better than the sum of their parts. According to Comcast CEO Brian Roberts, this merger will generate approximately $1.5 billion in efficiencies and cost savings that will help to drive the combined companies margins and earnings even higher than the two companies on their own.
The new combined company will be a much stronger one than the current Comcast, making the shares a good long term holding past the merger as well.
But will the merger actually go through? The deal has already faced some headwinds with regulatory and anti-competition concerns, but on Oct. 9, Comcast investors voted to move ahead with the merger, with 99% of votes cast in favor of the merger.
Is it time to buy Time Warner Cable now?
So is Time Warner Cable cable a buy now, or is it better to wait for the merger to complete? For one thing, the merger is not finalized, and there are plenty of examples of these mergers eventually not going through. So waiting around for the merger may be a fool's errand (little "f"). But regardless of the merger, Time Warner Cable looks like a strong play on its own, at an attractive valuation. Then if the merger does complete, that will only add value for long-term investors who stick with the company either way. For those reasons, Time Warner Cable looks like a good play now.
Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.