Earning Scorecard: Time Warner Cable (TWC)

The second largest cable operator in the United States, Time Warner Cable Inc. (TWC) postedexcellent second quarter 2010 financial results, which beat the Zacks Consensus Estimate. The increase was attributable to both the Commercial and Residential Subscription revenues, which grew along with Advertising revenues.

During the reported quarter, Time Warner Cable performed exceptionally well in Digital video subscriber addition. Primary Service Units increased by 60,000 to 26.7 million and bundled subscribers totaled 8.5 million, or 59.0% of total customers at the end of the quarter. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.

Second Quarter Highlights

In the second quarter, total revenue upped 5.8% year over year to $4,734 million and exceeded the Zacks Consensus Estimate of $4,674 million. This was attributable to an increase in both Subscription revenue segment and Advertising revenue segment.

GAAP net income was $342 million or 95 cents per share compared with a net income of $316 million or 89 cents per share in the prior-year quarter. Second quarter 2010 adjusted (excluding restructuring costs) EPS of 97 cents was well above the Zacks Consensus Estimate of 93 cents.

Agreements of Analysts

Overall, the earnings revision trend is mixed. For the third quarter of 2010, 8 out of 23 analysts covering the stock revised their estimates upward, while 6 analysts revised their estimates downward, over the last 30 days. For the next quarter also, 9 out of the 22 analysts covering the stock revised their estimates upward and 6 analysts moved downward, over the last 30 days.

For fiscal year 2010, 10 of 20 analysts increased their estimates, while only 2 revised their estimates downward, during the same period. Similarly, for the fiscal year 2011, 10 out of the 23 analysts revised their estimates upward, while 6 analysts decreased their estimates.

Time Warner Cable continues to execute well as the economy revives and aggregate spending rises. We believe the company has superior growth opportunities from the commercial business, particularly from wireless backhaul and small & medium sized enterprise market. Aggressive deployment of high-speed DOCSIS 3.0 network together with 4G WiMAX (under the brand name of “Road Runner Mobile”) will support its long-run growth.

While positive features dominate the majority analysts sentiments, there also exists some reverse opinions. Time Warner Cable lost 111,000 basic video customers in the second quarter 2010 due to a fierce competition from telecom and satellite pay-TV service providers. Additionally, the company is suffering from the lack of any effective media asset. As a result, Time Warner Cable is highly dependent on the TV content providers who are quickly increasing their programming fees.

Magnitude of Estimate Revisions

In accordance with the overall trend of estimate revisions for Time Warner Cable, the Zacks Consensus Estimate for the third quarter 2010 remains flat in the last 30 days, while for the next quarter, the Zacks Consensus Estimate increased by 1 cent. For fiscal 2010, the Zacks Consensus Estimate for EPS increased by 4 cents in the last 30 days, while for fiscal 2011, it increased by 3 cents.

Our Recommendation

In the past two consecutive quarters, Time Warner Cable posted strong growth in both top line and bottom line, coupled with a solid free cash flow. Despite rate hike, Time Warner Cable witnessed higher pay-per-view orders for pricier digital video packages. According to our view, customer demand for premium cable services will remain healthy in the near future as a result of an improving U.S. economy.

However, we remain concerned regarding the competitive environment. Apart from the threat of telecom/satellite operators, intra-industry competition among cable MSOs has also increased. Cablevision Systems Corp. (CVC) became the first U.S. cable MSO to launch a 100 Mbps broadband service using DOCSIS 3.0. Mediacom Communications Corp. (MCCC) is opting for 105 Mbps download speed. Comcast Corp. (CMCSA) is also likely to follow suite.

Time Warner Cable currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.

TIME WARNER CAB (TWC): Free Stock Analysis Report

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