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Time Warner Cable in bargain basement

Tue, 03/06/2007 - 6:05am

Copyright 2007 TheStreet.com, Inc.
All Rights Reserved
TheStreet.com
March 5, 2007 Monday 15:14 PM EST
By Nat Worden, TheStreet.com Staff Reporter
From Lexis Nexis

Time Warner's (TWX:NYSE) cable business debuted on the New York Stock Exchange during one of the worst weeks for stocks in years.

But for investors looking for a bargain, the timing could not have been better.

Shares of Time Warner Cable (TWC:NYSE), which remains 84%-owned by its media giant parent, began trading on the Big Board on Thursday and promptly lost 3% of its value before the market closed for the weekend.

The shares, which had traded previously on the pink sheets, recently were trading down 46 cents, or 1.2%, to $37.14. That marks a loss of 9.4% from where it opened a week ago before a sudden wave of turbulence hit the broader stock market in the form of a major selloff.

Rattled investors are now factoring a higher degree of risk into stock valuations after an extended period of complacency in the financial market. Meanwhile, Time Warner Cable issued guidance for 2007 that fell short of expectations on Wall Street, and the group of bondholders that received stock in the company in return for Adelphia assets that it bought out of bankruptcy could be selling off their shares.

The bad news could add up to an opportunity for investors who want to buy shares in the nation's second-largest cable company and third-largest pay-TV company at a discount.
 
"We consider [Time Warner Cable] a pure-play cable company with premier clusters, including New York City and Los Angeles, positioned for industry-leading growth," UBS analyst Aryeh Bourkoff wrote in a research report Monday.

With his report, Bourkoff began coverage of Time Warner Cable with a buy rating and a $48 price target. While he accepts that there may be some selling in the shares early on, he views it as a long-term story, and he says the market's defensive crouch only bodes well for the cable TV sector.

"Cable is a defensive sector with growth, which makes it a great place to be in this environment," says Bourkoff. "People don't disconnect their cable in tough times. Delinquency levels among subscribers to cable is extremely low."

For that reason, Bourkoff likes shares of Charter Communications (CHTR:Nasdaq), Comcast (CMCSA:Nasdaq) and Time Warner Cable.

Time Warner said last week that it expects revenue growth for its cable business, and growth in operating earnings before depreciation and amortization, in the mid-to-high 30s percentage range for 2007. It also expects 2007 free cash flow of $800 million to $1 billion.

Bourkoff says that forecast was more conservative than investors on Wall Street had hoped for, but he views that as a positive.

"It was in line with what we were expecting," says Bourkoff. "The company did a good job guiding to numbers that it could achieve and potentially beat. I think they're in a position to beat it."

He says the company has an opportunity to boost profit margins through revenue gains as it integrates the cable systems it acquired out of bankruptcy from Adelphia Communications and begins selling new phone services to those subscribers. That new revenue is expected to show up in the company's financials in the back half of this year and in 2008.

Meanwhile, Time Warner Cable also expects growth from the cable systems it owned before it made the Adelphia acquisitions.

"Underlying this outlook is our confident expectation of impressive growth in our legacy systems," said the company's CEO, Glenn Britt, on a conference call with analysts last week.

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