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Analysts Bullish On Time Warner Cable

By: Mike Farrell, Multichannel News

After coming off an improved third quarter, Time Warner Cable is expected to kick off the fourth-quarter financial reporting season Thursday (Jan. 28), with slightly weaker results. But that doesn't seem to matter to analysts, who see the pure-play cable operator as a major generator of cash in the foreseeable future.

Time Warner Cable hinted during its third-quarter conference call in November that fourth-quarter results may not be as strong. TWC's third quarter performance outpaced most analysts' estimates, with operating income before interest, depreciation and amortization (OIBDA) growth of 9% on an 8% rise in revenue. Basic subscriber losses, at 31,000 in the period, were also below most analysts estimates.

“As we look forward to the fourth quarter, we expect the slower subscription revenue growth, combined with tough political ad revenue comparisons and an increase in marketing spend, will result in somewhat slower year-over-year adjusted OIBDA growth than in the first three quarters of the year,” chief financial officer Rob Marcus said on TWC's November earnings call.

As a result, Miller Tabak media analyst David Joyce dropped his fourth-quarter revenue estimate slightly, to $4.56 billion from $4.58 billion, and increased his basic video loss estimates from 12,000 to 30,000, reflecting the continued sluggish economy. Other analysts followed suit.

But Joyce and other analysts still see growth in Time Warner's share price — he has a $52 per share target on the stock, while Sanford Bernstein cable and satellite analyst Craig Moffett set the bar at $60 per share. That optimism is due primarily to the belief that TWC will continue to report solid fundamental metrics and the expectation that the company will have the resources to return a significant amount of cash to shareholders through a cash dividend and share repurchases.

On the all-important subscriber-growth metric front, analysts are estimating TWC could lose between 30,000 and 80,000 basic customers, gain about 100,000 high-speed data customers and add between 50,000 and 126,000 phone subscribers.

The potential for a dividend was one of the catalysts behind TWC's strong stock performance in 2009 — shares were up 86% from $22.22 to $41.39 in 2009 — and is expected to fuel further rises in the share price. TWC shares closed at $46.36 each on Jan. 20.

Collins Stewart media analyst Tom Eagan (who has a “buy” rating and $49 target on the stock) has predicted that the dividend announcement could come soon. Just how big an annual dividend TWC will issue remains to be seen, with analysts' estimates as low as 60 cents and as high as $1.50 per share.

Moffett added that given TWC's target leverage of about 3.25 times forward-looking cash flow (which it expects to hit by the end of first quarter of this year) and its 11.5% free cash flow yield, the company could afford to give back shareholders about $6.50 per share in 2010 and more than $9 per share by 2011 and beyond. For that reason, Moffett believes that TWC also plans a substantial share repurchase program in 2010.

“We believe the marriage of a specific leverage target with generous free cash flow means, mathematically, TWC could become the industry's 'cash pipe,' funneling significant sums of cash to investors in the form of dividends and share repurchases,” Moffett wrote.

Moffett, who rates TWC a “buy,” also stated in a recent research report that the company's strategy to become a pure play cable operator — it severed ties with parent Time Warner Inc. in March — and its shareholder friendly capital structure (it's not afraid of leverage) warrants a substantial premium to the rest of the space.

The analysts don't seem to have the same warm feeling for Comcast shares, which in December announced its $30 billion NBC Universal joint venture.

In a research note in December, Eagan noted that Comcast could be spend as much as $12 billion to $15 billion more over the next several years to buy in the rest of the NBCU joint venture, which would less cash available for shareholders. “We expect this will significantly reduce Comcast's willingness, if not ability, to meaningfully buy back shares or increase its dividend,” Eagan wrote.

While Comcast stock is not expected to reach the same heights as TWC anytime soon (it's trading in the $16 to $17 range currently), the business is performing inline with peers. The country's largest MSO is slated to report fourth quarter results Feb. 3 and analysts are in agreement that revenue should be up about 3% to $9 billion and cash flow should rise 4% to $3.5 billion.

The disparity appears to be greatest around subscriber growth metrics, with Wells Fargo media analyst Marci Ryvicker and Eagan estimating basic customer losses of 185,000 and 150,000, respectively, while Joyce and Moffett estimated basic losses of 104,000 and 71,000 basic customers.


  Moffett Joyce Ryvicker Eagan
SOURCE: Individual analyst reports
Time Warner Cable
Revenue $4.5 billion $4.6 billion $4.5 billion $4.6 billion
Cash Flow $1.7 billion $1.7 billion $1.7 billion $1.7 billion
Free Cash Flow $383 million $386 million $426 million $268 million
Net Income $343 million $310 million $327 million $268 million
SOURCE: Individual analyst reports and Multichannel estimates
Revenue $9 billion $9.03 billion $9.04 billion $9.03 billion
Cash Flow $3.5 billion $3.5 billion $3.5 billion $3.5 billion
Free Cash Flow $1.1 billion $822 million $1.1 billion $1.3 billion
Net Income $755 million $767 million $716 million $906 million
SOURCE: Individual analyst reports
Time Warner Cable Subscriber Additions
Basic (41,000) (30,000) (80,000) (75,000)
Digital 89,000 57,000 9,000 25,000
High-Speed Data 109,000 98,000 100,000 95,000
Phone 126,000 104,000 50,000 86,000
SOURCE: Individual analyst reports
Comcast Subscriber Additions
Basic (71,000) (104,000) (185,000) (150,000)
Digital 348,000 325,000 190,000 199,000
High-Speed Data 138,000 299,000 200,000 150,000
Phone 241,000 260,000 200,000 216,000



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