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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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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