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Getting Bullish on Time Warner Cable

Time Warner Cable Inc. (NYSE: TWC), set to sever ties with Time Warner Inc. (NYSE: TWX) as early as the fourth quarter of 2008, offers investors an attractive buying opportunity even before the deal is consummated, according to one analyst.

"We believe a spin of TWC should, on balance, be greeted positively, and that the current overhang creates a buying opportunity," writes Sanford C. Bernstein & Co. Inc. analyst Craig Moffett in a report issued today.

In May, Time Warner Inc. announced it had reached a deal to spin off its 85.2 percent stake in the MSO. Part of the deal is that $10.27 debt-financed dividend -- $10.9 billion in total -- payable once the separation is complete. (See Time Warner Cable Leaving the Nest.)

With that dividend coming, the stock remains "far too cheap in our view," hovering near the all-time low cable industry valuations reached in March 2006 and September 2007, Moffett writes. (See Cable's Fall Season .)

In a longer-term view, Moffett also finds it intriguing that Time Warner Cable would be publicly owned.

"Remarkably, Time Warner Cable could become our country's first truly investor-owned cable operator. Shareholder activism, and even the prospect of a hostile take-over would be possible at TWC in a way that would be utterly unique among the cable group," he writes, noting how the MSO would stand out from a collection of more family-controlled U.S. cable operators such as Cablevision Systems Corp. (NYSE: CVC), Comcast Corp. (Nasdaq: CMCSA, CMCSK), and Charter Communications Inc. .

Moffett rates Time Warner Cable at "Outperform," with a target of $42. Time Warner Cable shares were trading at $25.75 each, up 13 cents, in midday trading Tuesday.

Moffett even sees reasons for investors to jump in before the cable MSO makes its clean break from the Time Warner Inc. nest.

Advertising, for one. Although a mere 5 percent to 6 percent of cable operator revenues come from advertising, two events will help to cultivate a "bumper crop of local cable ad dollars": the summer Olympics in Beijing and the U.S. presidential election.

Another big driver is expected to be the digital TV transition, as consumers who still get their video from over-the-air (OTA) sources decide to jump to cable. Bernstein has previously assumed that about 10 percent of the 14 million homes that still rely on OTA video signals could become cable customers. (See DTV Transition Could Catalyze Cable.) Time Warner Cable is in a position to add at least 210,000 video subs via this "once-in-a-generation" catalyst, according to Bernstein's "base case" DTV transition scenario.

— Jeff Baumgartner, Site Editor, Cable Digital News

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