We reiterate our long-term Neutral recommendation on Time Warner Cable Inc. 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.