This Large Cap Stock is Behaving Like a Small Cap

Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The stocks which usually qualify for my volume scans tend to be Small- and Mid-Cap stocks, reacting to a particular news item on a background of light(ish) trading.  However, sometimes a Large Cap stock will make the grade, and when it does it's usually for a good reason.   Time Warner Cable (NYSE: TWC) enjoyed one of these heavy volume days, despite having a Market Cap which ranks it the 103rd Largest Company.  Since its low in June, buying volume has sharply outpaced selling volume, and this is good news for the stock going forward. 

Given the extent of the advance, there will probably be some hesitancy by buyers coming into Q3 earnings  set for October 31.  While the broader market is punishing technology and smaller cap stocks, more so than large cap stocks, it's probably best to place this one on your watchlist until the market offers a more favorable condition for buying.

According to Trefis, cable TV business accounts for 46% of Time Warner's stock price, with 29% from Broadband Internet, with its other divisions taking up the minor spots.  Rival Comcast (NASDAQ: CMCSA) is more diversified in its business distribution, with 39% of its price attributed to cable TV, 26% from Broadband, and 16% from NBC and Comcast content.  Comcast only has $9.26 of debt per share compared to the $16.35 of Time Warner.  Dish Network (NASDAQ: DISH) is more of a one trick pony, with 63% of its price tied to its Satellite TV offering, but it has the lowest debt load at $6.14 per share.

Time Warner is a company which consistently beats across quarters, with Q3 and Q4 its key quarters.  Comcast also performs well, but missed on its most recent quarter. Dish Networks has struggled to offer earnings consistency, flat-lining through FY2011, in addition to coming in below estimates. Its heavier ties to a slowing TV business where content costs are determined by its larger rivals (although no slouch itself with a $15 billion Market Cap), mean it will invariably be fighting an uphill battle to compete.  In addition, the recent FCC ruling, reducing regulation on programming exclusives puts greater power into the hands of Comcast and Time Warner, which will only pile on the pain for Dish Network and its ilk.

Trefis projects broadband will become an ever increasing proportion of total revenue for Time Warner and Comcast, coming at the expense of cable TV.  However, such expectations don't come with carte blanche, despite strong organic growth (45% for Q2) for Time Warner in this area.  Time Warner pushed a controversial stealth modem rental charge on its retail broadband offering.  Not surprisingly, customers didn't take this charge lying down, and loopholes in the new charge only added to the PR troubles it generated.  The timing of the price hike was also poor.  The back-to-school period is an important acquisition period for new subscribers in Q3, and "Subscriber performance in the first several weeks of Q3 looks more or less like Q3 last year."  Unfortunately, the price hike has become an 'own goal' for the company, given Time Warner's services tend to be cheaper than Comcast's. As the hike, in effect, brings costs more in line with its chief competitor, but the public perception of this is otherwise.

An extensive comparison between Time Warner and Comcast in 2011 gave a slight edge to Comcast and this was bourne out when relative performance of the two stocks was compared, although an investment in either would have delivered rich rewards.  It's probably time for both stocks to take a breather, but both remain well positioned to prosper once the broader market recovers its footing.  Time Warner may have an edge as buyers appear to be liking it more in recent months.

One footnote to the Time Warner story was the unfortunate timing in the sale of 46 million Clearwire shares the company owned.  Clearwire experienced a huge jump in price on the back of Softbank's attempts to gain control of Clearwire (as part of its proposal to buy a big stake in Clearwire's major shareholder, Sprint Nextel).  But the wise heads at Time Warner had already dumped their holding prior to the jump.  To add insult to injury, the Clearwire 'investment' was ultimately a write-off for Time Warner. However, the $10s of millions they missed on the sale would have done little to offset the $0.5 billion+ they lost on the initial purchase into Clearwire. 

fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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