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We reiterate our long-term Neutral recommendation on Time Warner Cable Inc. (TWC - Analyst Report) 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 advertisements.

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. (VZ - Analyst Report) and AT&T Inc. (T - Analyst Report), 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 prior-year quarter.

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.

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