Media Talk

CBS Long-Term Story Very Much Intact

CBS reported mixed results for 4Q16 in a quarter where that was widely expected due to difficult comparisons.  The company showed three fewer Thursday night NFL games and lost 9 hours of primetime to election coverage.  This led to revenues and operating income declining by -2%; ignoring the discontinued radio operations that are being sold.  EPS grew by 2% to $1.11 thanks to CBS’s shareholder friendly capital allocation of modest debt leverage and aggressive share repurchases.

2017 is a challenging year for CBS to grow given the CBS Network broadcasted the 2016 Super Bowl and received a lot of political ad dollars at its local TV stations.  Comparisons get easier in the second half of 2017 when the TV network and stations will not have to compete with Olympics coverage on NBC and no network primetime is lost to election coverage.  A slow growth year is with revenues probably no better than breakeven.  EPS should still grow nicely, rising as much as 10% toward $4.50 per share boosted by share repurchases, including the upcoming exchange offer related to the sale of the radio assets.

The story at CBS is not about near-term earnings, however.  Rather the company remains arguably the best positioned media company to deal with the challenges of cord cutting skinny bundles, and internet-delivered OTT video services.  CBS has a rapidly growing revenue stream of retransmission payments received from cable and satellite companies and some of the new OTT services like Hulu and DirectTV Now.  These revenues are projected to grow by 25% this year and approximately double by 2020.  The company has also had success with its own OTT services including CBS All Access and Showtime.  Each has gained about 1.5 million subscribers is less than one year and both are ahead of schedule to meet the 2020 target for a total of 8 million subscribers.  As one of the largest producers of TV shows, including most of those shown on Showtime and CBS, the company also benefits from a robust secondary market for TV shows in the era of Peak TV.  Overseas demand is especially vibrant for the broadcast-friendly fare that CBS typically produces.  Finally, with only one broadcast network and one pay network, CBS is unlikely to face the same level of subscriber losses or damage to its economics that many other entertainment companies have while trying to protect a multitude networks against cord cutting and cord shaving.  CBS does have relatively high exposure to advertising at 45% of revenues but this has moved down from around 70% as CBS has strategically restructured its asset portfolio.

We think CBS shares could reach a 15 P-E on 2018 estimates by late this year, equating to an upside target of $75.  That is still a nice gain from current trading levels near $65 after the stock rose 35% in 2015.  In Northlake’s eyes the Tiffany Network retains its shine.

CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CBS is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.


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