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We reiterate our long-term Neutral recommendation on Time Warner Cable Inc. (TWC - Analyst Report) ahead of its third quarter of 2012 financial results. The company reported robust financial results in the second quarter. There were primarily four reasons for this solid performance: (1) new acquisitions of NewWave, NeviSite, and Insight have enhanced the company’s financials. Growth rate of revenue exceeds the growth rate of operating costs; (2) steadily growing demands for residential high-speed Internet services; (3) exceptionally solid performance by its Business Services segment; and (4) increasing political advertisements.

Consolidated ARPU is also increasing year over year. Time Warner Cable is gradually transforming itself as a leading broadband service provider with a formidable video distribution network in its offerings. Meanwhile, the stock price has soared over 75.5% in the last year. We believe Time Warner cable is fairly valued at this stage. 

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 threat 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 second 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 via systematic share repurchase and increase in dividend rate.

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