Wednesday, December 26, 2012

Time Warner Cable: Earnings Scorecard

The second largest cable operator in the United States, Time Warner Cable Inc. (TWC) posted excellent third 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.

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.

Third Quarter Highlights

Total revenue upped 5.2% year over year to $4,734 million and exceeded the Zacks Consensus Estimate of $4,719 million. This was attributable to an increase in residential subscription revenues, commercial subscription revenues and advertising revenues.

GAAP net income was $360 million or $1 per share compared with a net income of $268 million or 76 cents per share in the prior-year quarter. Third quarter 2010 adjusted EPS of 96 cents was significantly above the Zacks Consensus Estimate of 89 cents.

Agreements of Analysts

Overall, the earnings revision trend is mixed. For the fourth quarter of 2010, 9 out of 22 analysts covering the stock revised their estimates upward, while 3 analysts revised their estimates downward, over the last 30 days.

For fiscal year 2010, 14 of 22 analysts increased their estimates, while only 1 revised the estimate downward, during the same period. Similarly, for the fiscal year 2011, 14 out of the 24 analysts revised their estimates upward, while 3 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 and 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 opinion. Time Warner Cable lost 63,000 revenue generating units of which 17,000 are Primary Service Units. Basic Video subscribers were 12.551 million, down 155,000 sequentially.

Residential High-speed Data subscribers were 9.386 million, up 95,000 sequentially. Commercial High-speed Data subscribers were 0.324 million, up 9,000 sequentially. Residential Digital Phone subscribers were 4.324 million, up 22,000 sequentially.

Commercial Digital Phone subscribers were 0.102 million, up 12,000 sequentially. Digital Video subscribers were 9.013 million, down 46,000 sequentially

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.

Time Warner Cable lost 63,000 revenue generating units of which 17,000 are Primary Service Units.

Magnitude of Estimate Revisions

In accordance with the overall trend of estimate revisions for Time Warner Cable, the Zacks Consensus Estimate for fourth quarter 2010 increased by 2 cents from 99 cents to $1.01 per share.

For fiscal 2010, the Zacks Consensus Estimate for EPS increased by 8 cents, in the last 30 days, from $3.46 to $3.54 per share, while for fiscal 2011, it increased by 18 cents from $4.15 to $4.33 per share.

Our Recommendation

According to our view, customer demand for premium cable services will remain healthy in the near future as a result of an improving US economy. Management has announced a huge $4 billion of share buyback program to enhance shareholders’ wealth.

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 US 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.

We maintain our long-term Neutral recommendation for Time Warner Cable. Currently, it is a short-term Zacks #3 Rank (Hold) stock.

Disclosure: No position

No comments:

Post a Comment