Time Warner (TWC) is Upgrading Earnings Picture to High-Def - Barron's

The cable industry, boasting $79 billion in annual revenues, and massive amounts of cash, won't go quietly into the night as satellite TV picks up market share, a Barron'ss article reports today.

Companies such as satellite provide DirecTV (NYSE: DTV), and telecommunications giants AT&T (NYSE: T) and Verizon Communications (NYSE: VZ), are vying for consumer's eyes and wallets now so more than ever.

However, a phoenix on the rise is Time Warner Cable (NYSE: TWC), which is described as the largest pure-play cable operator, and is the number two player in the industry behind Comcast (NASDAQ: CMCSA). TWC boasts 14.6 million subscribers, markets across 28 states, and profit and cash flow growing at substantial rates.

TWC, currently $42, trades at slightly less than 12x FY10 EPS estimates. The stock may get a boost from a dividend declaration or stock buyback plan, as it is currently reflecting a 3-for-1 reverse split that occurred in March.

TWC and News Corp. (NASDAQ: NWSA) also recently settled their differences over programming fees, and the dropped litigation may add an extra dose of value to the top and bottom lines. Its said that, although NWSA was looking for about $1 per subscriber in retransmission rights, the actual amount may be between $0.50 - $0.75. Analysts at Collins Stewart said that the additional costs may reduce 2010 EBITDA by $6.3 - $19 million. However, TWC is expected to generate $7 billion in EBITDA, so they believe the impact will be immaterial.

Consensus estimates have FY09 EPS at $3.03, due in part to an estimated 15% earnings slump coming out of the recession. Net income this year is expected to reach $1.3 billion, or about $3.60 per share. Revs are estimated to be $18.52 billion for FY10, and the company earned $3.57 per share in 2008 on $17 billion in revenues.

Time Warner is trading at 4.9x enterprise value to FY10 EBITDA. Enterprise value is market value plus net debt, to account for a heavy depreciation expense. Others with similar values are Comcast and Cablevision (NYSE: CVC). Many believe, however, that TWC should be trading at 5.8x enterprise value to FY10 EBITDA due to the company's growth prospects. Soem analysts believe that the stock to reach up to $55 per share in 2010, and Gabelli & Co. thinks that the stock should be trading at $69/share, a 64% premium.

TWC lost 84,000 basic subscribers in the third quarter last year, and estimates have subscribers dropping 2.5% this year. However, revenue rose 3.6% in Q309. Analysts see growth in ad revenue and a deeper penetration of bundled residential high-speed data and digital phone products.

Capital spending fell 13% for Q309 but EBITDA rose 4% and the company had free cash flow of $465 million.

Morningstar sees growth in new technologies, more so than in its peers. TWC management also sees the commercial engine as a potential growth area. Commercial-services grew 15% in Q309, and ended up accounting for 5% of total revenues. That growth, however, accounted for 19% of total growth experienced for the period.

Cable providers face an ever-increasing uphill challenge. Subscribers are cutting back, might look for an a la carte menu (paying for only those channels that they watch), or simply quitting cable for free online content. However, TWC added 72,000 subs to their digital-phone service and 121,000 net additions to high-speed service, more than AT&T or Verizon reported.

TWC is now a lean, mean, broadcasting machine. Now if only the cable guy would show up on time...

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