Time Warner Cable Remains Neutral

We reiterate our long-term Neutral recommendation on Time Warner Cable Inc. ( TWC - Analyst Report ) following its mixed financial results for the third quarter of 2012. The company currently enjoys a short-term Zacks #3 Rank (Hold) rating on the stock.

The company demonstrated an impressive annualized progress primarily attributable to: (1) new acquisitions of NewWave, NeviSite, and Insight, which have enhanced the company’s financials, owing to which the 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) growing political advertisements.

Consolidated ARPU is also increasing year over year. Time Warner Cable is transforming itself as a leading broadband service provider with formidable video distribution network in its offerings. Free cash flow also remains healthy. Meanwhile, the stock price has soared nearly 54% in the last year. Business segment became a major growth driver for Time Warner Cable. Time Warner Cable has undertaken a massive "Ethernet Everywhere" strategy and is boosting cloud computing services.

Nevertheless, cable operators are facing fierce competition from telecom service providers like Verizon Communications Inc. ( VZ - Analyst Report ) and AT&T Inc. ( T - Analyst Report ) , which are quickly gaining market share from cable MSOs by offering fiber-based TV and other high-speed broadband services to their subscribers.

Online video streaming service providers, such as Netflix Inc. ( NFLX - Analyst Report ) , Hulu.com, YouTube etc., have become a severe threat to the cable TV operators. These 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 gains momentum, especially when the economic headwind still persists.