Time Warner Cable About $10 Too Expensive As Debt Jumps Higher

Time Warner Cable, recently announced a debt offering of $1.9 billion. ^[] This additional amount is expected to be used for general corporate purposes, which may include the repayment of debt and repurchase of the company’s stock. Time Warner Cable has more than $20 billion of net debt (total debt minus cash) outstanding, which compares to our roughly $20 billion estimated intrinsic value for the company and an implied $55.46 price estimate.

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

The recent debt offering means that Time Warner Cable is much more sensitive to changes in business conditions compared to some of its competitors given its higher leverage. Thus, it becomes even more critical for the company to maintain its competitiveness, as higher leverage heightens the company’s sensitivity to key value drivers like market share. We have a $55.46 Trefis price estimate for Time Warner Cable’s stock here.

Impact of Leverage on Company Valuation

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To examine the impact of higher leverage, we can look at how Time Warner Cable’s value changes with respect to change in its pay-TV market share. Currently we forecast stable market share going forward despite the declines that the company has seen in the past.

With its current debt levels, an annual 1% increase in pay-TV market share (including 2010) over the course of the Trefis forecast period leads to a 48% increase in the company’s value. However, if we change the net debt amount to zero and perform a similar experiment, the overall company value would increase by only 24%. The company’s value demonstrates similar downside sensitivity to changes in market share – and heightened risk.

The upside and downside risk of Time Warner Cable’s stock is high given its large debt levels. Thus it becomes absolutely necessary for the company to remain competitive and maintain both share and pricing, although Time Warner Cable is not alone in this position as other highly leveraged companies like Sprint face similar issues.

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

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Market Meets New Wall of Worry Or More Likely Just Brief Profit-Taking On Way To Higher Highs

Stocks pulled back after a big advance and that can be good for bull markets

Most of the bricks in the previous wall of worry have been removed.?Economic reports have continued to improve over recent weeks; in manufacturing, the service sector, retail sales, durable goods orders, and even in the employment picture, where 151,000 new jobs were created in October, more than double the 70,000 that economists expected.

The uncertainty over the Federal Reserve’s QE2 decision has been resolved with the Fed adding to the stimulating atmosphere, providing another round of quantitative easing in spite of the already improving economy.

The major U.S. market indexes, including the Dow, S&P 500, and Nasdaq rallied back to, and then above the potential resistance at their April peaks, before pulling back some this week.

Investors have become even more bullish and optimistic. This week’s poll of its members by the American Association of Individual Investors showed 57.6% bullish, the highest level in almost four years.

The good news apparently also reached Main Street. On Friday morning it was reported that the Thomson Reuters/University of Michigan’s Consumer Sentiment Index improved to 69.3 in early November (its highest level in five months) from 67.7 in October.

So what has been wrong with global markets this week?

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The U.S. market closed down roughly 2.5% for the week. Emerging markets, which many analysts projected would benefit the most from inflows of additional liquidity provided by the Fed’s decision, were down the most. Brazil, India, South Korea, closed down two to three percent for the week, while China closed down a big 5.5%. Meanwhile, Japan, a large developed country, which was not supposed to fare as well as emerging country markets, closed up 1.0% for the week.

A bet against emerging markets via the ProShares UltraShort Emerging Markets ETF, symbol EEV (designed to move up when emerging markets move down, and leveraged two to one) closed up almost 9.0% for the week.

Was it just that markets had become short-term overbought and ran into a brief bout of profit-taking, particularly since this was the week before the month’s options expirations week, and the week before tends to be negative?

If so, markets are likely to be back up next week since the decline this week took care of the short-term overbought condition, and next week is the week of the expirations, which tend to be positive.

Or was the decline the beginning of something more serious?

The market does seem to have a new wall of worry just a week after concerns about the economic recovery, and whether the Fed would or would not provide additional quantitative easing, faded away.

The bricks in the new wall of worry include:

• Concerns that the Fed’s additional stimulus may cause new problems rather than help the economy by encouraging home purchases or providing new jobs.
• Worries that commodity prices had spiked up into bubbles which may burst, a worry that struck Friday with the big $40 an ounce (3%) plunge in the price of gold, and equally large declines in the price of oil and other important commodities.
• Apprehensions about the activities of the Chinese government, including talk that it might hike interest rates to dramatically slow its globally important economy and ward off threatening excessive inflation in China.
• Anxiety about a potential currency or trade war if the decline in the U.S. dollar continues.

Via technical analysis there is also the U.S. market’s intermediate-term overbought condition above 20-week moving averages, and the high level of investor bullishness (which is at levels of complacency often seen at market tops).

The uncertainties have even extended to U.S. Treasury bonds, which investors have piled into as a perceived safe haven over the last two years. The safe haven over the last two months has actually been a bet against U.S. Treasury bonds. For instance, the ‘inverse’ ProShares Short 20-year bond etf, symbol TBF, designed to move up when bonds move down, has gained 11% since early September, while bonds have declined 11%.

There’s no doubt about it. We are still in a very fluid economic and investing period, not a time for investors to become so complacent as the investor sentiment readings seem to indicate, that they fall asleep at the switch.

(In the interest of full disclosure, we have positions in the U.S. market, the Japanese market, gold, and the ‘inverse’ bond ETF TBF, in our portfolio, at least at the moment).

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Higher Data Revenues Can Push Sprint Past $5

Can do quite nicely with data plans

Growing demand for smartphones and greater availability of high quality networks have led to healthy growth in data revenues, which includes Internet and SMS, for network operators like Sprint, AT&T, and Verizon.

In recent years, Sprint has seen a significant jump in its monthly Internet and SMS revenue per mobile subscriber from around $5.80 in 2005 to around $14.00 in 2009 based on our estimates. [1] We expect the positive growth trend to continue, albeit at a slower rate, accounting for a larger user base and increased competition.

The average Trefis member forecast projects a higher mobile data average revenue per user than what we currently forecast, corresponding to an additional upside of 20% to our price estimate. We currently have a Trefis price estimate of $4.35 for Sprint’s stock, about 9% above the current market price of around $4.00.

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Smartphone Demand + Good Network Speeds = Higher Data Usage

Internet & SMS Revenue Per Sprint Mobile Subscriber refers to the average monthly amount spent by Sprint’s customers on non-voice communication, such as messaging, surfing the Internet, downloading music, playing games, and any other data-intensive activities.

With a marked improvement in both connection speeds and reliability, data usage has moved on from the traditional SMS or text messaging to higher bandwidth consumption activities like sending email and, increasingly, video clips. A TechWorld article, sourcing Cisco’s study, suggests that data usage for US subscribers with 3G (or better) phones is poised to rise from the current 32 MB a month to as high as 739 MB per month by 2013. [2]

Increasing use of smartphones like Apple’s iPhone and RIM’s BlackBerry have resulted in higher data usage. In addition to constantly improving operating systems and new handset features, customized games and social media apps for mobile phones allow users to access social media sites Twitter and Facebook from their phones. Accessing emails, posting status updates, and uploading pictures all consume significant amounts of data, generating more revenues for network operators like Sprint. According to Sprint CEO, Dan Hesse, nearly half of Sprint’s subscriber base would be using smartphones by end of 2010. [3]

Downside: Drawbacks to higher data use is the increased costs of maintaining this network and intense competition among wireless operators that could prevent them from hiking rates as quickly as in the past, resulting in slower growth in data ARPU for Sprint.

The average forecast of Trefis members for Internet & SMS Revenue Per Sprint Mobile Subscriber indicate an increase from around $17 per month in 2010 to around $23 by 2016, compared to the baseline Trefis estimate of an increase from $14.70 in 2010 to around $19 by the end of the Trefis forecast period. The member estimates imply an additional upside of 19% to the Trefis price estimate, which is around 9% higher than Sprint’s current market price.

Our complete analysis for Sprint Nextel’s stock is here.

Notes:

1. Estimated based on common data plans listed on Sprint’s website and Fee Per Subscriber as reported in the company’s SEC filings. Fee Per Subscriber includes SMS, Internet and voice communication components.

2. Europeans likely to use more mobile data than US, says Cisco

3. GigaOm Article dated October 29, 2010: Interview with Sprint CEO

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