TWC may weather '08 well after all


NEW YORK -- Big cable stocks took a big pounding last year, and 2008 is off to a weak start as well. Several analysts, however, now see value in shares of Time Warner Cable, the second-largest industry player, even though some suggest the company could be hurt by a possible U.S. recession.

Comcast Corp., the biggest U.S. cable operator, in December came out and reduced its 2007 guidance, citing a sluggish economy.

"Despite the fact that competition will continue to intensify within the backdrop of a slowing economic environment for 2008, we still believe Time Warner Cable will be able to leverage a turnaround at the acquired systems with its increased scale," Goldman Sachs analyst Ingrid Chung said in a report. The acquired systems are the ones TWC got in the joint takeover of Adelphia Communications with Comcast.

These systems are showing some momentum, analysts say, based on TWC's recent fourth-quarter earnings report. "Acquired systems show promising signs of improvement," with their integration challenges finally in the past, Citi Investment Research analyst Jason Bazinet argued.

This is key as Chung warns that "legacy systems subscriber growth has slowed due to economic and competitive headwinds."

Chung has a "neutral" rating on TWC shares, but Bazinet has a "buy" on the stock with a $44 price target, arguing it is "significantly oversold."

Barrington Research analyst James Goss echoed that point in a recent investor note that reaffirmed his "outperform" rating on TWC shares with a $31 price target. "Some of the competitive issues seem real, but the market's response has been overdone," he argued.

Miller Tabak + Co. analyst David Joyce just reduced his 2008 financial estimates on TWC citing "higher programming costs, tempered video (average revenue per user) and greater sustainable network capital expenditures," which mean decreasing free cash flow.

However, Joyce also emphasizes that the stock is "still at historically low valuations," which is why he continues to rate it a "buy" with a short-term price target of $32 and a long-term $39 target.

Bear Stearns analyst Spencer Wang took a similar approach. While slightly lowering his 2008 operating cash flow growth estimate to 10.5% "due to our expectation for higher marketing costs," he is otherwise upbeat on the outlook for TWC shares.