Earnings Preview: Time Warner Cable Inc. - Analyst Blog

Time Warner Cable Inc. (TWC) is slated to release its third quarter 2010 results on Thursday, November 4 before the market opens. The current Zacks Consensus Estimate for the third quarter is 89 cents, representing an annualized growth of 17.34%.

With respect to earnings surprise, over the trailing four quarters, Time Warner Cable has outperformed the Zacks Consensus Estimate for the all four quarters. The average earnings surprise was a positive 6.93%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Second-Quarter Performance

On August 5, Time Warner Cable reported its second quarter fiscal 2010 results. 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. Total revenue surged 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.

During the quarter, Time Warner Cable added 68,000 triple-play subscribers to 3.658 million, lost 29,000 double-play subscribers to 4.889 million and lost 83,000 Single play subscribers to 5.951 million.

Agreement of Estimate Revisions

In the last 30 days, out of the 22 analysts covering the stock, 4 analysts increased their EPS estimates, while 3 analysts decreased their EPS estimates for third quarter fiscal 2010.

In the last 30 days, out of the 21 analysts covering the stock, 4 analysts increased their EPS estimates and 4 decreased their EPS estimates for fiscal 2010. Similarly, for fiscal 2011, out of the 24 analysts covering the stock, 4 analysts increased their EPS estimates and 7 decreased their estimates.

Magnitude of Estimate Revisions

Despite the positive revision, earnings estimates for third quarter, in the last 30 days, remained flat at 89 cents. Similarly, for fiscal year 2010, the earnings estimate revision was flat at $3.46. While for fiscal 2011, the earnings estimate revision went down by 2 cents from $4.17 to $4.15.

In the U.S., cable operators are facing fierce competition from both telecom and satellite service providers. TV telecom service providers are quickly gaining market share from cable MSOs by offering Mobile TV and other high-speed broadband services to subscribers. Time Warner Cable lost 111,000 basic video customers in second quarter 2010.

However, Time Warner Cable is aggressively rolling out next-generation DOCSIS 3.0 (also called Wideband) service. The company has taken a decision to continue to roll out switched digital video (SDV) in three major markets of Los Angeles, New York City and Dallas.

Deployment of SDV will free up bandwidth that can be used by Time Warner Cable to offer 100 high-definition TV channels (HDTV), HD video-on-demand programs and DOCSIS 3.0. The company will offer DOCSIS 3.0 services to both the residential and business customers.

Our Take

Despite being the second largest cable MSO of the U.S., Time Warner Cable is facing severe competition from both telecom and satellite service providers that started offering subscription TV services. On the other side, we also remain optimistic regarding the company's diversification, network upgrade and innovative product offering strategies. According to our view, future stock price will be supported by these positive factors.

We like the shares of Time Warner Cable, given the company's robust FCF generation, attractive valuation, appealing dividend yield, potential for increased capital returns through dividend boost and/or share repurchases in 2010 or 2011 and solid growth from new revenue streams such as Small to Medium Enterpise (SME) and high margin advertising.

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