Why We Are Revising Our Price Estimate For Time Warner Cable

Time Warner Cable (NYSE:TWC) reported its full year earnings recently, adding 650,000 high-speed data subscribers in 2014, compared to 210,000 in 2013. ^[1] The company also lost fewer pay-TV subscribers last year. It was able to overcome the disappointing subscriber trends of 2013 and accordingly its stock was up over 17% last year. We are increasing our price estimate for Time Warner Cable to $158 based on the revisions we made to its high speed data business segment and its required cost of capital.

See our complete analysis for Time Warner Cable

The High Speed Data Segment Has Performed Exceedingly Well

We estimate that high-speed data segment contributes close to 47% to Time Warner Cable’s stock value. The company has demonstrated rapid growth in this segment in recent years and its subscriber base has increased from 8 million in 2007 to around 12.25 million at year-end 2014. ^[1] Time Warner Cable has been steadily increasing its Fee per Broadband Subscriber for the past few years. This figure has gone up from around $42 per month in 2007 to over $54 in 2014. Due to the continued uptake of higher tier services, which is driving the uptrend in fee per broadband subscriber, we have revised our price estimate for Time Warner Cable’s stock. We believe that the company’s monthly broadband fee per subscriber can reach $80 by 2021, as opposed to our earlier projection of $75. Similarly, Time Warner Cable’s market share in the high speed internet market is still inching up and we believe the figure can reach 13.7% by the end of our forecast period.

The high-speed internet business has been the leading growth factor for cable companies for quite some time now. There is a boom in demand in the U.S. due to a growing need for speed and connectivity. Currently, high-speed internet penetration in the U.S. homes stands at 73%, leaving enough room for growth. ^[2] In the long run we estimate that high-speed internet will penetrate over 95% U.S. homes. This will benefit the cable industry in particular as it accounts for approximately 60% of the U.S. high-speed internet market. ^[3] The use of multiple devices and the higher penetration of smartphones are also aiding the overall demand for high-speed Internet. Smartphone penetration has seen rapid growth from 54% in December 2012 to nearly 74% in November 2014. Internet video, video-on-demand and online gaming account for the majority of Internet traffic in the U.S. Video streaming, for instance, requires high data volumes which explains why the reliance on fixed networks is far greater than that on mobile carriers. These factors will help Time Warner Cable in consistently gaining Internet subscribers in the long run.

Lower Weighted Average Cost Of Capital

We have revised our discount rate (or weighted average cost of capital) downwards for valuing Time Warner Cable’s stock. This is the rate at which we discount the company’s future cash flows, and is the weighted average of its after-tax cost of debt and cost of equity. This figure is a measure of a company’s risk. Time Warner Cable justifies this revision as the stock’s beta has come down in the past year. Beta is a measure of company’s stock volatility relative to broader market. Time Warner Cable’s correlation to the broader market has improved, which means that the risk of fluctuations in its stock price has come down. The company has also been able to stabilize its business and increase its revenues without taking on substantial debt. It has reduced its leverage with the total debt declining from $25.1 billion in 2013 to $23.7 billion in 2014. ^[1] This reduces the risk in the company and warrants the revision.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Time Warner Cable’s SEC Filings [↩] [↩] [↩]
2. The State of the Internet, Akamai [↩]
3. ABOUT 700,000 ADD BROADBAND IN THE THIRD QUARTER OF 2014, November 18, 2014, Leichtman Research Group [↩]