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Time Warner Cable Inc. (TWC) is slated to release its third quarter 2011 results on Thursday, October 27, before the opening bell. The current Zacks Consensus Estimate for the third quarter is pegged at $1.14, representing an annualized growth of 18.92%.

With respect to earnings surprises over the trailing four quarters, Time Warner Cable has outperformed the Zacks Consensus Estimate in three of the last four quarters. The average earnings surprise was positive 2.88%, implying that the company has surpassed the Zacks Consensus Estimate by the same magnitude over the last three quarters.

Second Quarter Recap

On July 28, 2011, Time Warner Cable reported its second quarter 2011 financial results. Total quarterly revenue increased 4.4% year over year to $4,944 million, surpassing the Zacks Consensus Estimate of $4,933 million. This was attributable to an increase in residential subscription revenue, commercial subscription revenue, and advertising revenue.

Quarterly GAAP net income was $420 million or $1.24 per share compared with a net income of $342 million or 95 cents per share in the prior-year quarter. Second quarter 2011 adjusted (excluding special items) EPS of $1.18 was well above the Zacks Consensus Estimate of $1.15.

Agreement of Estimate Revisions

In the last 30 days, out of the 18 analysts covering the stock, none increased the EPS estimate for the third quarter of 2011 but seven analysts reduced the same. For the fourth quarter of fiscal 2011, out of the 17 analysts covering the stock, two analysts increased their EPS estimates while three slashed their estimates.

Similarly, for fiscal 2011, in the last 30 days, out of the 19 analysts covering the stock, two analysts increased their estimates while four analysts moved downward. For fiscal 2012, out of the 21 analysts covering the stock, two analysts increased their EPS estimates while five analysts moved in the opposite direction.

We believe that most of the analysts adopted a bearish stance based on the fear of continuous loss of subscribers. Moreover, sluggish housing market growth in the U.S. mainly due to stringent rules prevailing in the housing market will put pressure on Time Warner Cable’s top-line growth.

However, we believe that high-speed data revenue will be a significant catalyst for revenue growth in the upcoming quarters as more subscribers continue to increase video streaming usage.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate for the third quarter was just a penny above the current estimate of $1.14. However, for the fourth quarter of 2011, the Zacks Consensus Estimate dipped by a penny from the current estimate of $1.26.For fiscal 2011, the Zacks Consensus Estimate was at par with the current estimate of $4.56. However, for fiscal 2012, the Zacks Consensus Estimate was 7 cents above the current estimate of $5.64.

Earning Surprises

In the previous quarter, Time Warner Cable reported EPS of $1.18, which surpassed the Zacks Consensus Estimate by 3 cents. The current Zacks Consensus Estimate for the ongoing quarter contains a 1.75% downside potential while for the upcoming quarter, it is reflecting a 0.79% downside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011, the Zacks Consensus Estimate reflects an upside potential of 0.00% but the Zacks Consensus Estimate for 2012 contains an upside potential of 0.18%.

Our Recommendation

Solid free cash flow, healthy demand for premium cable services resulting from the improving U.S. economy and increased subscribers growth will drive the company’s top-line and bottom-line growth, in our view. Moreover, the company’s strong share buy back program coupled with robust advertising market will act as tailwinds for the stock going forward.

However, continuous loss of video subscribers coupled with stiff competition from formidable rivals like Comcast (CMCSA) and AT&T’s (T) U-Verse networkas well as the newly emerged online video streaming companies like Netflix, Inc (NFLX) and Hulu, will hurt profitability going forward.

We maintain our long-term Neutral recommendation on Time Warner Cable. Currently, Time Warner Cable has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

Source: Time Warner Cable: Earnings Preview