We reiterate our Neutral recommendation on Time Warner Cable Inc. (TWC) backed by its impressive first-quarter 2011 financial results. Time Warner Cable posted strong growth in both top line and bottom line coupled with solid free cash flow. Revenue increased across the business lines including video, high-speed Internet, voice, and advertising. Fall in video customer base was more than offset by massive growth of high-speed data and digital phone subscribers. After Comcast Corp. (CMCSA), the company is the second largest cable MSO in the U.S.
Time Warner Cable has decided to remain a pure play content distribution platform. Investing in high-speed Internet, digital video, bundled video offerings and the commercial business will remain the major growth initiative of Time Warner Cable. Time Warner Cable generated significant subscriber growth for its broadband and digital phone services. In first-quarter 2011, both Residential and Commercial segments added 273,000 net subscribers for the company’s High-Speed Internet and Digital phone services. Bundled subscribers of Time Warner Cable now totaled 8.646 million, an increase of 100,000 over the previous quarter.
In the first quarter of 2011, advertising revenue of Time Warner Cable increased by a whopping 13.9% year-over-year. This momentum is expected to remain strong in the near future. Free cash flow, a key growth metric for the cable TV industry due to its highly leveraged nature, grew 42.2% year over year. The company also got benefited from the higher price charged for its services. Quarterly subscription ARPU increased 3.4% year over year. We believe customer demand for premium cable services will remain strong in the near future as a result of improving U.S. economy. Management declared a huge $4 billion share buyback program and further hiked dividend by 20% to enhance shareholders’ wealth.
Meanwhile, the stock price has surged up 64% last year and currently stayed at the high-end of the 52-week price range. We believe Time Warner Cable is fairly valued at current level.
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