Time Warner Cable Inc. (TWC) recently delivered solid second quarter results as the company was able to turn modest revenue growth of 4% into a stellar 22% increase in earnings per share, due to a relatively high degree of leverage.
Consensus estimates for both 2011 and 2012 have been rising off of the quarter, sending the stock to a Zacks #2 Rank (Buy).
Time Warner Cable also reported a 43% increase in free cash flow, which it used to buy back shares and pay out a dividend that yields 3.0%. Valuation looks attractive too, which shares sporting a PEG ratio of just 0.75.
Company Description
Time Warner Cable Inc. provides video, high-speed data and voice services to approximately 14.5 million residential and business customers in five main geographic areas: New York State (including New York City), the Carolinas, Ohio, Southern California (including Los Angeles) and Texas.
The company was spun off from Time Warner Inc. (TWX) in March of 2009.
Second Quarter Results
Time Warner Cable reported better than expected results for the second quarter on July 28. Earnings per share came in at $1.18, beating the Zacks Consensus Estimate by 3 cents. It was a 22% increase over the same quarter in 2010.
Revenue rose 4% to $4.9 billion. Total residential services revenue, which accounted for 87% of total revenue, increased 2.5% as an 8.5% increase in high-speed data offset a slight decline in video. Total business services revenue increased a stellar 35%.
Operating expenses rose just 2% year-over-year as the company leveraged its fixed costs. This led to a solid 16% increase in operating income.
Outlook
Consensus estimates for both 2011 and 2012 rose following the strong quarter, sending the stock to a Zacks #2 Rank (Buy).
Analysts are expecting low single-digit revenue growth over the next two years to lead to double-digit earnings growth through operating and financial leverage. The Zacks Consensus Estimate for 2011 is $4.56, representing 23% EPS growth. The 2012 Zacks Consensus Estimate is currently $5.71, corresponding with 25% EPS growth.
Returning Value to Shareholders
Another factor expected to drive EPS growth is the massive amount of shares the company is buying back. This stems from its strong free cash flow, which rose 43% to $815 million in the quarter.
Time Warner Cable spent a whopping $863 million on share repurchases in the second quarter alone, or 11.5 million shares of common stock. At the end of the second quarter, approximately $1.8 billion remained under the company’s share repurchase authorization.
The company also paid out $163 million in dividends during the quarter. It currently yields a solid 3.0%.
Valuation
Valuation looks very reasonable for TWC with shares trading at 13.8x forward earnings, in-line with the industry average. Its PEG ratio is an attractive 0.75 based on a 5-year EPS growth rate of 18.4%.
The Bottom Line
Time Warner Cable offers investors stellar EPS growth and a solid 3.0% dividend yield at a very reasonable price.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.
