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We upgrade our recommendation to Neutral on Time Warner Cable Inc. (TWC), the second largest cable MSO in the U.S., ahead of its first quarter of 2013 financial results.

Why the Upgrade?

We expect Time Warner Cable to perform well in the near future mainly due to: (1)acquisitions of NewWave, NeviSite, and Insight, which have enhanced the company’s financials and (2) growing demand for residential high-speed Internet service and Business services segments.

We view the change in Time Warner Cable’s business model as positive. The U.S. pay-TV industry is at present facing significant challenges from several fronts. Economic volatility in the U.S., growing competitive threat from fiber-based TV services of telecom operators and availability of online video streaming services, have imposed mounting pressure on the traditional pay-TV operators.

As a survival strategy, management has decided to adopt a four pronged approach: (1) rebrand itself as a major broadband service provider for residential customers (2) aggressively penetrate the commercial business segment (3) change in marketing strategy like product segmentation and (4) significant enhancement of shareholders’ wealth, such as systematic share repurchase and increase in dividend rate. At present, Time Warner Cable has a Zacks Rank #3 (Hold).

Balanced View on Time Warner Cable

Meanwhile, the company continues to losebasic video subscribers without any interruption since 2009. We do not know when this trend will ultimately reverse. Growing competitive threats from telecom, satellite TV and online video streaming operators along with steadily increasing programming costs are taking a heavy toll on Time Warner Cable’s finances.

Unlike rival Comcast Corp. (CMCSA), the company is suffering from lack of any media asset. Similarly, unlike DIRECTV Inc. (DTV), Time Warner Cable is lacking geographical diversification as it operates only within the U.S. DISH Network Corp. (DISH) is trying hard to become an integrated wireless-satellite TV bundled service provider.   

Nevertheless, over the last three years, the company has been systematically enhancing its shareholders’ wealth either through a share repurchase program or by increasing its dividend rate. The Board of Directors of Time Warner Cable decided to hike its regular quarterly dividend from $0.56 per share to $0.65 per share, a significant jump of 16%.

 
COMCAST CORP A (CMCSA): Free Stock Analysis Report
 
DISH NETWORK CP (DISH): Free Stock Analysis Report
 
DIRECTV (DTV): Free Stock Analysis Report
 
TIME WARNER CAB (TWC): Free Stock Analysis Report
 
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