We have previously stated that Time Warner Cable (NYSE:TWC) has been faring relatively poorly in terms of pay-TV subscriber trends compared to its peers. The company has been slow in embracing the concept of “TV Everywhere,” which is basically making programming accessible to customers from any device and anywhere. In addition, the company hasn’t done as well as Comcast (NASDAQ:CMCSA) in terms of bundling. As a result, its video subscriber losses have been worse in the context of the size of its subscriber base. This may continue in Q4 2012 as a Jefferies & Co. report forecasts that Time Warner Cable’s video subscriber losses will worsen compared to Q4 of 2011.  In comparison, Comcast will show improvement.
While a single quarter’s performance does not materially impact a company’s valuation, it may be an indicator of the trend to come. If Time Warner Cable’s disappointing performance in the upcoming quarter continues beyond that and the company never really gets back to growth track, there could be downside of more than 5% to our price estimate. Our price estimate for Time Warner Cable currently stands at $93, implying a discount of about 5% to the market price. The potential downside results from the assumption that the company’s subscriber base will decline to 11.6 million over the next 6 years compared to the current base of close to 12.2 million.
While Time Warner Cable has struggled with its video subscribers, it has been growing its EBITDA (earnings before interest, taxes, depreciation and amortization) margins for the past few years on its success in broadband. The strategy of trimming programming packages by dropping lesser viewed channels is going to further support its margins. We note that Time Warner Cable’s programming expenses increased by 6.3% and 8.2% for the first nine months of 2012 and Q3 2012, respectively.  In comparison, its video revenues increased by just 3.4% and 3.7% for the respective time periods. Notes:
- Comcast, Cablevision, Charter to shore up video losses in Q4, says Jefferies, Fierce Telecom, Jan 18 2012 [↩]
- Time Warner Cable’s SEC Filings [↩] [↩]