Shares of Time Warner Cable (NYSE: TWC) are up about 10% so far this year as the company has reported four straight quarters of rising revenue. In the most recent quarter, TWC posted income growth up more than 10% year over year and an adjusted EPS increase of 11.8% to $1.89. But with shares already up on the strong results, is there any room for growth left? With subscriber growth momentum, as well as the pending merger with Comcast (CMCSA +0.92%), it looks like there is. Here are three reasons that this stock could go higher still.
1. New subscriber momentum
Fresh subscribers added to its residential and business segments helped to fuel Time Warner Cable's revenue increases this year. The company's subscriber momentum that started at the end of last year continued to increase in the second quarter, which marked the company's best subscriber performance in years. The same was true for the first quarter, and the same will likely be true for the third quarter, which the company is due to report on at the end of October.
During Q2 the company added 67,000 broadband Internet customers, totaling nearly 340,000 new Internet customer relationships for the first half of the year. With the momentum built so far this year, more subscribers in Q3 will mean another healthy increase in the company's year over year revenue and income just as it has in the last two quarters.
To help build continued growth in Q3, the company released an array of innovative products and services over the last few month such as TWC Maxx, a broadband service that provides speeds of up to 300 megabits a second. This product was only released to select markets to start, but will be available to many more markets in the rest of this year and next, which is another reason to believe that this subscriber growth momentum will continue in Q3 and Q4.
As for how this fuels TWC's bottom line, 11.415 million residential high-speed data subscribers brought TWC's Q2 revenues of over $1.6 billion, up 12% YoY. This is not just from added subscribers, but from higher average revenue per user (ARPU) as well. During Q2, the average monthly revenue per user in residential high-speed data increased 9.7% to $46.92. With higher ARPU and more customers than ever, revenues in Q3 should continue to gain as well.
2. An immediate boost with the merger
Another reason that investors in TWC could gain in the next few quarters is through the company's proposed merger with Comcast, which was announced back in February of this year. While the merger has yet to pass the FCC's approval, the completion of the merger will likely be good for TWC investors both short and long term.
Courtesy: Comcast
Per the merger guidance, each share of Time Warner Cable will be converted to 2.875 shares of Comcast at the close of the merger. At current CMCSA valuation, that places shares of TWC worth about $156 per share in the merger, which is about 5.5% higher than TWC's closing stock price on Sept. 23. As an added bonus with the TWC to CMCSA gains from the merger, that gain will be tax free.
While the merger will likely mean a small jump in share value for holders of TWC shares, as the TWC shares convert to CMCSA shares, would Time Warner Cable investors want to own shares of the merged company? For long-term investors who would have been happy to continue owning Time Warner Cable, the merged Comcast shares look even more attractive. Comcast looks attractive on its own, with Q2 income up more than 10% year over year. With the added benefits of the merger, the new company looks like it will be even stronger.
3. Long term, the new Comcast will gain even more value
Comcast, with its X1 video operating system that integrates mobile apps, voice control, and other features into its video service, is already a company focused on network and technological innovations. Combining that with Time Warner Cable's own tech innovations such as its TWC Maxx discussed above, the resulting combination will be a company with even more of the most advanced technology in the industry. This will be good for TWC/Comcast subscribers, as well as shareholders who see an increase in subscriber growth and revenue when the market sees that the new Comcast has some of the most advanced technology around.
Another way this merger will increase the bottom line is through cost efficiencies aimed at driving better margins and profitability. In announcing the merger, Comcast CEO Brian Roberts noted that the merger will lead to approximately $1.5 billion in total cost savings through increased efficiencies and combined operations. Through merging the two companies' technology and cost efficiencies, the new company could be even better than the sum of its parts, driving even more shareholder value for TWC investors who stick with the company, under the Comcast name, for the long term.
Foolish final take
As its own company, TWC looks like a solid play. The success the company has had in the last few quarters of subscriber growth momentum has helped to spur higher and higher revenues this year. With new technology opening up to a much larger market later this year and next, those subscriber numbers should continue to increase. And with higher revenue per user, that will translate to higher revenues, earnings, and likely share price.
But an even more interesting bet on the company's stock going higher in the future is the coming merger with Comcast, that at current prices would translate to an immediate tax-free share-price gain when the merger happens. Following the merger, the combined new company under the Comcast name is likely to continue performing very well, driving even more long-term share-price value for investors who stick with Time Warner Cable through its conversion and into the future.
