We reiterate our long-term Neutral recommendation on
Time Warner Cable Inc.
) following its robust financial results for the second quarter of
2012, easily beating the Zacks Consensus Estimates. Meanwhile, the
stock price has soared nearly 56% in the last year. We believe the
company is currently fairly valued.
There are mainly four reasons for this solid performance: (1)
acquisitions of NewWave, NeviSite and Insight have enhanced the
company's financials. Growth rate of revenue exceeds the growth
rate of operating expenses (2) growing demands for residential
high-speed Internet services (3) very strong performance by its
Business Services segment, and (4) increasing political
Time Warner Cable is gradually transforming itself as a leading
broadband service provider with a formidable video distribution
network in its offerings. In the last quarter, consolidated ARPU
increased by 3% year over year.
We view the change in Time Warner Cable's business model as
positive. The U.S. pay-TV industry is at present facing significant
challenges from several fronts.
Economic volatility in the U.S., growing competitive threats
from fiber-based TV services of telecom operators, such as
Verizon Communications Inc.
), and availability of cheaper substitutes, such as online video
streaming services, have imposed mounting pressure on the
traditional pay-TV operators, and Time Warner Cable is no
exception. In the previous quarter, Time Warner Cable lost 169,000
residential video customers compared with 130,000 customers in the
As a surviving strategy, management has decided to adopt a
four-edged approach: (1) rebrand itself as a major broadband
service provider for residential customers (2) aggressively
penetrate the commercial business segment (3) change in marketing
strategy like product segmentation and (4) significant enhancement
of shareholders' wealth, such as systematic share repurchase and
increase in dividend rate.
AT&T INC (T): Free Stock Analysis Report
TIME WARNER CAB (TWC): Free Stock Analysis
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