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April 02, 2009

Housekeeping: Sold Time Warner Cable

I sold all the shares clients received last week in Time Warner Cable (TWC) as a dividend from Time Warner (TWX). For each share of TWX owned prior to the 1 for 3 reverse split, clients received .03867 shares of TWC.

For the long-term, I think the market is undervaluing cable stocks but I fear that 2009 estimates will still be falling especially as the companies report 1Q09 results late this month. Current estimates call for low to mid single digit growth rates for operating cash flow in 2009. I fear a negative reaction in cable stocks if those estimates fall further. In addition, I am worried about a further deceleration in subscriber growth. The hit to financial performance will be minor but investor sentiment may sour as fears about the competition between cable, telco, and satellite TV companies grow.

In the long-term, I think investors are already too pessimistic toward cable companies. As the economy stabilizes and resumes growth, operating cash flow should accelerate to mid single digits. In this scenario, free cash flow will grow double digit. Current valuations for cable stocks on EBITDA or free cash flow suggest that growth may remain flat or go negative. With plenty of penetration left for broadband, digital TV, advanced TV services, and telephone, I think a mid-single digit growth rate is likely. The risk to this bullish outlook are that basic cable subscription loses accelerate and/or pricing on all services falls in a discounting battle with telcos.

TWC has a bit more short-term risk than Comcast because its balance sheet is stretched due to the $10 billion dividend it paid, moslty to TWX, as part of the restructuring. In addition, the CEO has been unusually bearish in his public comments, which makes me worry about 1H09 trends. Thus, sell TWC now and keep an eye on cable stocks for an opportunity later this year when expectations are fully reset lower.

TWX is held in Northlake client accounts including my personal accounts.

Posted by Steve Birenberg at April 2, 2009 09:26 AM in TWX