« News Corp Bidding For Dow Jones | Main | Media Madness »

May 02, 2007

Time Warner Cable: First Quarter As Public Company Shows Promise

Time Warner Cable (TWC) reported good 1Q07 results. Investors will cheer the solid performance at the company's legacy cable systems and signs of improvement at newly acquired Adelphia systems. The cable business is very healthy for all companies providing a solid foundation for growth at TWC. TWC has the added benefit of bringing its newly acquired systems up to industry standards which will drive above average gains in revenue, EBITDA, free cash flow, and subscriber growth. 1Q07 results indicate that progress at the acquired systems may be a little ahead of schedule and that is good news for TWC shares.

TWC reported revenues of $3.85 billion and EBITDA of $1.31 billion. Revenues were slightly below the consensus but EBTIDA was on target implying that margin performance was good. In fact, margins came in at 33.9% vs. my expectation for 33.5%. On the call management said that further margin progress would be evident in the seasonally weak second quarter (college students and snowbirds disconnect) and that results should accelerate in second half as previous guidance suggested. TWC's EBITDA margins is running 300 basis points behind Comcast (CMCSA/CMCSK) providing ample and easily achievable upside over the next year or two.....

At the subscriber level, TWC exceeded analyst estimates. Basic subscribers grew by 46,000 vs. expectations of 10,000. Upside occurred at legacy and acquired systems. The improvement at legacy systems shows that the triple play still has great marketing power even after more than a year of the national rollout. The reduction in lost customers at the acquired systems suggests that progress is occurring at or ahead of schedule.

Digital and high speed data subs both beat estimates with upside at both legacy and acquired systems. Telephony additions improved over the weak 4Q06 performance but only met expectations. Telephony additions at the acquired systems beat analyst estimates, a good sign for the future as Adelphia systems trailed industry trends severely in telephony.

Capital spending was as expected, higher but driven by success-based spending on customer premise equipment. As long as the return on this spending is adequate, investors should not complain about elevated spending. Given improving margins and falling churn, I think the returns are just fine.

The bottom line is that TWC looks attractive but the upside is an industry call. I think sentiment toward cable stocks has gotten too negative in recent months. Results from 1Q TWC and Comcast and Comcast's confident long-term guidance issued yesterday should begin to turn the sentiment and push the stocks back to and through the 52-week highs in coming months.

Posted by Steve Birenberg at May 2, 2007 09:07 AM in Comcast/Cable TV