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Is Time Warner Cable a Good Investment?

Time Warner Cable Inc (NYSE:TWC) saw its stock drop almost 6% on the news that the cable-television company missed 3Q earnings estimates, with EPS coming in at $1.41, below the consensus of $1.43 a share. The miss comes as the second largest U.S. cable operator saw a greater than expected loss of subscribers, losing some 140,000 video subscribers, versus estimates of 128,000.

Despite the decline we believe that Time Warner could now be a good buy. Time Warner has made key acquisitions, including Insight and Navisite that will drive its expected 2013 revenue growth of 5%. Even as video subscription numbers may continue to see pressure from other cable and satellite companies, Time Warner should be able to offset this decline with voice services to residential customers and the bundling of high-speed data. This industry leading cable and Internet provider also has plans for a selective Wi-Fi rollout and a bundled offering with partner Verizon.

Other notable companies that might be able to infringe on Time Warner’s business are DIRECTV (NASDAQ:DTV), Dish Network Corp. (NASDAQ:DISH), Charter Communications, Inc. (NASDAQ:CHTR) and Comcast Corporation (NASDAQ:CMCSA). The satellite provider DirecTV saw its first ever second quarter U.S. subscriber decline in history; although Warren Buffett is a subscriber. Meanwhile, Latin America posted record subscriber growth and positive reception of wireless broadband.

Warren Buffett

Dish Network is the second largest U.S. satellite TV provider, behind only DirecTV. Dish lost 160,000+ subscribers in 2011 and with no rate increases in 2012, it should see average revenue per user decline. Other key problems for Dish are higher programming acquisition costs and increased general & admin expenses with the addition of Blockbuster. We see Comcast and Time Warner being leaders in the bundled offering space, putting pressure on both DirecTV and Dish Network. Both the satellite companies trade at 13x earnings, but we believe this is for good reason, as these companies are seeing more pressure from online streaming that might limit their long-term growth prospects.

Charter, the fourth largest U.S. cable provider, has missed EPS estimates each of the last four quarters by at least 50%. We believe this struggling cable company will continue to lag behind Comcast and Time Warner, especially as the company looks to implement new initiatives to drive growth. Trying to enter the high-speed data offering market has the cable company’s net profit margin hovering around negative 5%. The major concern is not just Charter’s current situation, but its ability to execute its planned growth, which is questionable. Expected five-year earnings is the lowest of our listed cable or satellite companies, at a 5% CAGR.

Comcast now operates as a diversified entertainment company following its 2011 acquisition of NBC Universal. Growth for this conglomerate will come from similar bundled services as Time Warner, with the bundling of video, data and voice. We are excited by Time Warner’s prospects and similarly looking forward to Comcast’s, where the company should be able to grow five-year EPS at a 15% CAGR on the back of rising advertising revenues and momentum in its cable business.

Fund interest for Comcast includes two that stand well above the others, each with a share count over 17.5 million each. First Eagle Investment Management – where Comcast was a First Eagle top pick – and Eagle Capital Management had large positions, with 2.8% and 4.5% of their 2Q 13F portfolios invested in Comcast respectively. Time Warner had various smaller funds owning the top number of shares and is a HBK Investments’ top pick. The top fund owner was Chieftain Capital, which had 19% of its 2Q 13F invested in Time Warner.

Time Warner pays the highest dividend of the five at 2.3%, but does trade the highest on a P/E basis at 18x. In the end we believe that Time Warner will continue to be a strong performer, but we also like Comcast, which pays the second largest divided of the five at a 1.7% yield. Although the two cable providers look a bit rich on a valuation basis, they both have industry-leading profit margins and superb five-year expected earnings growth rates.

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