While continued sluggishness in retail and job growth data
lately cast ominous clouds over the health of the U.S. consumer
discretionary sector, the recently signed deal between
Time Warner Cable Inc.
) might give a much-needed boost to the space. The merger means a
lot to the cable industry, given Comcast and Time Warner Cable are
the top two operators in the space (read:
A Comprehensive Guide to Retail ETFs
Inside the Deal
On February 13, Comcast has
agreement of Time Warner Cable. Comcast's bid of approximately $159
per share will add up to a total consideration of $45.2 billion.
Each share of Time Warner Cable will translate into 2.875 Comcast
Following the completion of the transaction, Time Warner Cable
shareholders will hold around 23% of the merged body. The deal is
expected to be wrapped up within a year, subject to regulatory
Investors should note that Time Warner Cable, which has been an
interesting acquisition target for quite some, repeatedly was
offered decent sums by the likes of
Charter Communications Inc.
Liberty Media Corp.
). However, Time Warner Cable declined those proposals as it viewed
the offer prices as too low.
We view the deal as strategically positive as both operate under
the same group thus deriving significant cost synergies. Both the
parties can gain on each other's exposure profile.
The deal's effectiveness can further be validated by Comcast's plan
to bolster its share repurchase activity to $10 billion at the
close of the transaction, even after its
recent plan to expand
share buyback authority to $7.5 billion from $1 billion (read:
Apple Stock Repurchases Puts Buyback ETF in
Upon completion of the deal,
the merged entity
will likely derive as much as $1.5 billion of operating savings, of
which 50% may be realized within the first year after merger.
Market & ETF Impact
The shares of Comcast and Time Warner Cable saw opposite movements
at the close of February 13 with the former slipping and the latter
moving northward. However, Comcast gained slightly (0.29%) in after
hours trading while Time Warner Cable dipped 0.06%.
Notably, Time Warner Cable's latest share price of $144.73 is still
more than 8% below the offer price. Investors might have sought to
capture this near-term potential in Time Warner Cable. Trading
volumes were about 8 times higher than the average level for both
Quite expectedly, if the deal gets approved, Comcast will emerge as
a much bigger entity in the U.S. Cable TV space. Keeping that in
mind, it would be prudent to identify some ETFs having sizable
exposure in Comcast indicating that these ETFs might hugely benefit
from Comcast's potential uptrend and enhanced buyback. Below, we
have highlighted some of the funds:
Consumer Discretionary Select Sector SPDR Fund
XLY is by far the largest product in the consumer discretionary
space with more than $5.0 billion in assets. In its 86-stock
portfolio, the in-focus Comcast takes up the top spot with 7.15%
The ETF charges a meager 18 bps in fees a year and pays a dividend
yield of 1.21%. The fund returned 42.7% in 2013 but has lost about
3.0% in the year-to-date time frame (as of February 12, 2014)
Time to Bet on This Small Cap Consumer ETF
The fund gained 0.31% in the key trading session on February 13.
XLY has a Zacks ETF Rank of 2 or 'Buy' rating with a 'Medium' risk
iShares U.S. Consumer Services ETF
The fund tracks companies in fields like Retail, Media, Hotels,
Textile and Apparel. The product manages an asset base of $446.2
million which it invests in 185 securities. Media captures the
second position as far sector holdings are concerned having an
exposure of approximately 29%. Comcast occupies the top spot in
individual holdings with about 5.49%.
The fund charges an annual fee of 45 basis points (see more in the
). IYC gained 42.5% last year, but lost 1.61% year to date.
Yesterday, IYC gained 0.41%. The fund has a Zacks ETF Rank of
3 or Hold with a 'Low' risk outlook.
PowerShares Dynamic Media Portfolio
Though Comcast is not PBS's portfolio, the ETF has 4.81% share in
Time Warner Cable and thus should indirectly benefit from this
deal. The ETF - a 30-stock basket of media-related companies - has
amassed $304.6 million in assets. The product charges 63 bps in
fees and expenses from investors (read:
Media ETF Leading the Consumer Sector Higher
The fund has a Zacks ETF Rank of 2 or Buy and 'Medium' risk outlook
and has delivered a stellar return of 59.94% in 2013 year to date
but lost 3.76% year to date. PBS gained 1.34% on the day of the
Overall, the consumer discretionary space is pushing the market
lower to start 2014 hit by severe cold in the U.S, faltering
consumer sentiment regarding the sustainability of the economic
growth and overvaluation of the space. However, some specific
corners of the segment, like media, may brighten up in the coming
At present, Comcast and Time Warner Cable have a Zacks Rank #3
(Hold) and #2 (Buy), respectively. Investors might want to
buy in the products on its dip to lock-in the new entity's
potential, if the deal can pass what looks to be significant
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COMCAST CORP A (CMCSA): Free Stock Analysis
ISHARS-US CN CY (IYC): ETF Research Reports
PWRSH-DYN MEDIA (PBS): ETF Research Reports
TIME WARNER CAB (TWC): Free Stock Analysis
SPDR-CONS DISCR (XLY): ETF Research Reports
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