TWC : NYSE $ 91.93 BUY Pullback Overdone
Time Warner Cable. Time Warner Cable is the 2nd largest US cable operator. The company serves 12mm basic video subscribers. Time Warner Cable also provides high speed data and phone services
TWC fell approx. 6.36% (in an admittedly down day for PayTV stocks) due to concern with 3Q12 results and prospects that fundamental trends were deteriorating. While true that the results were below many of our est, we believe the pullback was overdone. Moreover, there were several positive trends, including 7% ARPU growth at the TWC Legacy systems, lower HSD churn among wifi users, 22% organic Business Services revenue growth and high-level usage of the TWC.TV apps, which over time should reduce video churn. EPS guidance was increased (due to the spectrum sale) and FY12 FCF guidance was maintained.
The FCF growth is important because it confirms our expectation that TWC is positioned to repurchase $2.5-2.75bn+ (or 9%) of shares in FY13.
Positive results in 4th Q 2012 – several items could benefit results, such as impact of the modem fee increase (which the company indicated would be passed through to the bulk of its customers); the LA RSN launch, which appears to be adding video connects in that market; and the 30% advertising growth (due to political).
Maintaining the FCF guidance translates to 4Q12 FCF of $555m (above our $485m est) and positions TWC to increase its 2013 share repurchases to $2.5- 2.75bn. The new EPS guidance translates to 4Q12 EPS of $1.27 to $1.52, slightly below our $1.63 est.