Time Warner Cable: Improvements Could Take Time, While Comcast Is Cheaper

Includes: CHTR, CMCSA
by: Eric Savitz

The process of spinning off Time Warner Cable (TWC) from its corporate parent Time Warner (NYSE:TWX) has finally happened, and the stock is now trading on its own on the NYSE. That means it's time for the cable analysts to start covering it - it is, after all, the second biggest player in the industry after Comcast (NASDAQ:CMCSA).

Ergo, Bear Stearns cable analyst Spencer Wang picked up coverage Friday, starting the shares with a Peer Perform rating. Wang says he believes the company will improve the performance of the former Adelphia systems it recently acquired, “leading to strong intermediate term growth.” Nonetheless, Wang thinks “some Street estimates may be too ambitious for ‘07.” He thinks Comcast has a better risk/reward profile.

Wang says the company can push up the performance of the old Adelphia systems by rolling out cutting-edge features like triple-play bundles, DVRs, video on demand and high def broadcasts. But he says the improvements will take time.

Wang calculates fair value for the shares at $41 a share, or about $4.097 per subscriber. “We think CMCSA warrants a higher per sub valuation given comparable growth, higher margins due to slower programming cost growth and higher cash flow per sub,” he writes. “We, therefore, see more appreciation potential in CMCSA currently, especially in light of recent declines.”

Time Warner Cable Friday was down 58 cents at $38.35. Comcast was up 3 cents at $25.57.

Previously: Time Warner Cable Sees 2007 Revs, OIBDA Showing “Mid-To-High” 30s Percentage Gains (February 28, 2007)