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On Jan 29, 2014, we upgraded our recommendation on Time Warner Cable Inc. (TWC - Analyst Report) to Outperform from Neutral.

Why the Upgrade?

Lately, Time Warner Cable has become an easy acquisition target for most cable companies in the U.S. due to its persistent loss of video subscribers. Nevertheless, the acquisitions of NewWave, NeviSite and Insight are likely to drive its top line going forward. Moreover, growing demand in the Residential high-speed Internet and Business services segments is expected to act as tailwinds for the company going forward.

Detailed Analysis

The Business Services segment has become a major growth driver for Time Warner Cable. In the reported quarter, Commercial revenues were $594 million, up 20.5% year over year. All segments across the board – commercial data, business class phone, and mobile tower backhaul – are contributing significantly to the company. The company intends to double its Business Service revenues within 4 to 5 years.

The proposed acquisition of DukeNet will further strengthen the Business Service division of Time Warner Cable. In the reported quarter, Time Warner Cable launched several innovative products and services. As a result, the average monthly revenue per user rose 2% to $105.

Moreover, availability of the cloud-based user guide for set-top boxes and additional TVEverywhere features for iOS, Android platforms and Roku TV streaming boxes, Samsung Smart TV and Xbox devices will drive subscriber growth in the upcoming quarters. Furthermore, renewal of distribution agreement with Discovery Communications Inc., free Samsung tablets (powered with TWC TV apps) offered to customers coupled with the promotion of bundled packages at attractive rates are expected to counter subscriber loss going forward.

Currently, Time Warner Cable has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Other stocks that are worth considering within this sector are BT Group plc (BT - Snapshot Report), Netflix Inc. (NFLX - Analyst Report) and Level 3 Communications, Inc. (LVLT - Snapshot Report). BT Group currently has a Zacks Rank #1 (Strong Buy), while both Netflix and Level 3 carry a Zacks Rank #2 (Buy).

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