Time Warner Squeezes More Money From Subscribers But Stock Is Still Too Chunky

Cable guy is getting paid

Time Warner Cable recently released its third quarter earnings. As a result of continued ARPU (average revenue per user) growth as well as reduced capital expenditures, we have increased our price estimate for Time Warner Cable’s stock to $55.46, which is about 12% below the current market price.

Time Warner Cable competes primarily with Comcast , AT&T and Verizon in both the pay-TV and broadband businesses as well as satellite pay-TV providers like Dish Network and DirecTV.

Market Share Gains and ARPU Growth

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One of the key takeaways from its recent earnings is Time Warner Cable’s success in the broadband market. Besides continued momentum in market share gains, the company is also experiencing growth in broadband ARPU.

We now expect ARPU to reach $48 by the end of our forecast period compared to $42 in 2009. If ARPU reaches $52 by end of our forecast period, this adds about 7% upside to our current price estimate.

2 Key Drivers to ARPU Growth:

1) Premium Services

Time Warner Cable’s broadband ARPU is benefiting from more subscribers taking premium services. Subscriptions for its Turbo service increased by 123,000 ^[] in Q3 while customers subscribing to Docsis 3.0 increased by 4,000. ^[] These services increase broadband speeds for its users for an extra charge to their monthly bill.

The company states that currently about 13% of its residential high-speed data subscribers now have these premium offerings. As premium tier subscribers are outpacing net subscriber additions, ^[] we feel that penetration will increase for premium tier broadband offerings.

2) 4G/3G Wireless Broadband

Time Warner Cable has also launched a combined 4G/3G wireless service in New York City. This service can deliver speeds of up to 6 Mbps ^[] making it one of the fastest mobile broadband networks available. ^[] Users can connect to this service using laptops, smartphones or other wireless devices.

Although the company is offering data plans for as low as $20 per month ^[] (with 250 MB data cap), these are not likely to replace its wire line broadband service. Instead, we believe this will provide mobile aiding ARPU growth.

You can see the complete $55.46 Trefis price estimate for Time Warner Cable’s stock here.

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