Time Warner Cable Inc. (TWC), the second largest cable MSO in the U.S., reported somber results in third quarter 2011, which missed our expectations. Moreover, we remain concerned regarding the continued subscriber loss in its core video segment.
Third Quarter Highlights
Quarterly GAAP net income was $356 million or $1.08 per share compared with a net income of $360 million or $1.00 per share in the prior-year quarter. Third quarter 2011 adjusted (excluding special items) EPS of $1.10 was well below the Zacks Consensus Estimate of $1.14.
Total revenue spiked 3.7% year over year to $4,911 million, but lagged the Zacks Consensus Estimate of $4,941 million. The year-over-year increase was attributable to higher residential subscription revenue and commercial subscription revenue, partially offset by lower advertising revenue.
GAAP operating income grew 8.1% year over year to $1,002 million, driven by higher adjusted OIBDA and lower amortization expenses.
Agreements of Analysts
Of the 20 analysts covering the stock in the last 7 days, none revised their estimates upward, but one analyst slashed the estimate for the ensuing fourth quarter of 2011. For the first quarter of 2012, out of the seven analysts covering the stock, none changed their estimates.
For fiscal 2011, out of the 19 analysts none revised their estimates. Likewise, for fiscal 2012, out of the 20 analysts, one analyst increased the estimate but none reduced the same.
Most of the analysts prefer to remain on the sidelines due to the continuous slump in the U.S. housing industry arising from the sluggish economic growth. Moreover, continuous loss of video subscribers is another concern for the analyst.
Currently, the Zacks Consensus EPS Estimate for the fourth quarter of 2011 is pegged at $1.21 per share with a projected annual growth of 22.27%. Similarly, for the first quarter of 2012, the current Zacks Consensus EPS Estimate of $1.25 per share reflects a year-over-year gain of 18.81%.
Magnitude of Estimate Revisions
For the fourth quarter of 2011 and first quarter of 2012, the Zacks Consensus Estimates remained in line with the current estimates of $1.21 and $1.20, respectively, over the last 7 days. Likewise, for fiscal 2011, during the last 7 days, the Zacks Consensus Estimate was flat with the current estimate of $4.47. But for fiscal 2012, the Zacks Consensus Estimates was just a penny below the current estimate of $5.39.
With respect to earnings surprises, the company has produced an average earnings surprise of 0.25% in the trailing four quarters. The current Zacks Consensus Estimates for both the ongoing quarter and the first quarter of 2012 contain 0.83% and 0.00% downside risk (essentially a proxy for future earning surprises), respectively, while for fiscal 2011 the downside risk is 0.45%. However, the 2012 Zacks Consensus Estimate reflects an upside potential of 1.11%.
Solid free cash flow and healthy demand for premium cable services along with strong share buyback program will drive the company’s top-line and bottom-line growth.
However, huge debt coupled with a rise in programming cost and continuous loss of subscribers will act as headwinds for the company going forward. Moreover, stiff competition from formidable rivals like Comcast (NASDAQ:CMCSA) and AT&T’s (NYSE:T) U-Verse networkas well as the newly emerged online video streaming companies like Netflix, Inc (NASDAQ:NFLX) and Hulu, is expected to 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.
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