Media Talk

CBS Tracking Above Long Term Guidance

Amid a tough quarter for media earnings, CBS was a bright spot.  We have long liked CBS for two reasons and both were on display in 1Q17.  First, management continues to execute quite well as evidenced by better than peer trends in national and local advertising and subscription fees.  Second, and related to effective management, CBS has a narrow focus and unique revenue and cash flow drivers that leave it less impacted by secular concerns about the changing TV ecosystem.  CBS does not own any major cable networks, so is not materially impacted by cord cutting and cord shaving.  With a focus on its CBS Network and Showtime assets, the company is able to drive growth as retransmission and subscription fees grow for these networks that are highly valued by viewers.  The focus on just two networks has also allowed CBS to lead the industry by creating standalone direct consumer OTT products for both CBS and Showtime.  Additionally, CBS is able to monetize its own created content by selling it to multichannel and OTT providers around the world.

During 1Q17, each of these initiatives tracked above the long-term guidance CBS provided last year for 2020 revenue and profit targets.  Later this year, the company will complete divestiture of its radio division, providing a large cash inflow that will be used to shrink the share count, maintain a strong balance sheet, and continue above average dividend increases.

First quarter earnings results in media have reignited fears of a breakdown in the TV ecosystem as cord cutting picked up pace, TV ratings continued to fall, and advertising trends softened.  We think CBS is the best positioned company to weather these challenges due to the unique drivers outlined above.  CBS shares led the bounce back in media stocks in 2016 and early 2017 off the 2015 lows when secular fears about the TV ecosystem last turned investors bearish.  We see a similar dynamic playing out this year and believe CBS shares can make new highs north of $70 as investors realize the sky is not falling for the industry (or at least not falling as quickly as they fear) and reward CBS for its superior competitive position, management, and strategic decisions.

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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