(TWC) Time Warner Cable Plans Inorganic Growth

Time Warner Cable Inc. (TWC), the second-largest cable operator in the U.S. after Comcast Corporation (CMCSA), is planning to acquire cable operation from NewWave Communications. The transaction is expected to cost Time Warner $260 million and will be closed by the end of 2011, subject to regulatory approvals.

The acquisition will help the company in two ways. First, it will allow Time Warner to expand its footprint to non-urban areas where NewWave mainly operates. Second, Time Warner will cumulate 70,000 basic cable customers, 42,000 Internet users and 26,000 telecom subscribers of NewWave Communications.

The urban areas are becoming highly competitive as big telecom giants like Verizon Wireless Communication (VZ) and AT&T, Inc (T) are offering cable services through Fiber to the Node (FTTN) or Fiber to the Premises (FTTP) communications network. So, this acquisition will help Time Warner to extend its services to other sub-urban areas like Kentucky and western Tennessee as well as enhance its presence in other new markets.

In the first quarter of 2011, Time Warner Cable posted strong top-line and bottom-line growth, coupled with solid free cash flow. Both revenues and earnings were ahead of the Zacks Consensus Estimate. The company witnessed robust growth across all its segments.

Strong fundamentals, higher subscriber additions, solid cash flow coupled with increased share repurchase plans and a hike in dividend are positives for the stock going forward. However, stiff competition from other cable and satellite operators like Comcast, DIRECTV (DTV), and DISH Network Corporation (DISH), higher debt burden and soaring programming costs will act as headwinds for the company.

More importantly, the newly emerged online video streaming companies like Netflix, Inc (NFLX), Hulu, YouTube, are posing greater threat to the pay-TV industry with their cheaper plans.

We, thus, maintain our long-term Neutral recommendation for Time Warner Cable Inc. Currently, Time Warner Cable Inc. has a Zacks#3 Rank, implying a short-term Hold rating on the stock.

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