We are downgrading our recommendation on
Time Warner Cable Inc.
) to Underperform backed by the company's weak financial guidance
for 2013. The company is losing video subscribers without any
interruption since 2009. We do not know when this trend will
Why the Downgrade
Growing competitive threats from telecom, satellite TV and
online video streaming operators along with soaring programming
costs are taking heavy toll on Time Warner Cable's finances. The
company estimated that its programming costs will increase by 10%
Further, the total amount of high-margin political
advertisement will be significantly below the prior-year level.
As a result, the company's operating margin will decline 0.5-1%
Management guided that its fiscal 2013 adjusted earnings per
share will grow by 10-14%, which is way below the initial Zacks
Consensus Estimate of 20% growth. Time Warner Cable currently has
a Zacks Rank #5 (Strong Sell).
The multi-channel video market in the U.S. is almost
saturated. Roughly 87% of the total 114 million TV
household in the U.S. are at present multi-channel TV
subscribers. It is not easy to gain customers from competitors
since each and every pay-TV operators are offering innovative
For example, the online videos provide an extremely cheaper
source of TV programming unless the customer is very eager to see
real-time programs like sports events. This business model is
gaining momentum, especially when the economic headwind is still
Time Warner Cable must change its business model simply as a
pure-play pay-TV operator and broadband service provider in the
U.S. The company's closest competitor,
), has decided to acquire full control of NBC Universal, which
will position the company as a formidable integrated content
developer and TV distribution company.
) is significantly expanding its base in the Latin America region
beside the U.S., while
DISH Network Corp.
) is trying hard to become an integrated wireless-satellite TV
bundled service provider. Despite so many changes in the pay-TV
industry's internal dynamics, Time Warner Cable is lagging as an
innovative business model.
Other Stocks to Consider
Other stocks to consider in the U.S. pay-TV industry are
Comcast, DIRECTV and DISH Network. While Comcast's net earnings
slightly fell below the Zacks Consensus Estimate in the most
recent quarter, DIRECTV handily beat the same. DISH Network is
yet to release its earnings results. However, all these three
stocks currently have a Zacks Rank #3 (Hold).
COMCAST CORP A (CMCSA): Free Stock Analysis
DISH NETWORK CP (DISH): Free Stock Analysis
DIRECTV (DTV): Free Stock Analysis Report
TIME WARNER CAB (TWC): Free Stock Analysis
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