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April 25, 2006

CBS Earnings Preview: 1Q 2006

Since their debut at the beginning of January, CBS (CBS) shares have generally trended lower due to concerns over the company's long-term growth rate and how it intends to use its cash flow. Ahead of its 1Q06 earnings report tomorrow morning, the shares are trading at 15 times 2006 estimated EPS and less than 8 times EBITDA. Most analysts like the shares.

The consensus EPS estimate for 1Q is 27 cents on revenues of $3.53 billion. Tv, the company's largest business at about 65% of revenues is projected to show revenue and EBITDA growth in the low double digits. Outdoor, aobut 14% of revenue, is projected to be the growth star with revenues up 5% or more and EBITDA rising 15%. Radio, also about 14% of revenues, is the problem child. Due to the loss of Howard Stern and the malaise throughout the industry, revenue is projected to fall about 5% with EBITDA falling 12%....

Based on current analyst estimates, 1Q will mark the low point for revenue and EBITDA growth in 2006. Growth should accelerate over the balance of the year with mid-single digit top line and slightly higher EBITDA growth projected.

The big questions for CBS are what is the long-term growth rate and how will it be achieved. Bullish analysts feel that small acquisitions, the addition of retransmission dollars from cable companies, monetizing new distribution channels, and share repurchase and dividends can drive top line growth and gains in the share price. On the other hand, if growth remains in the low single digits, further multiple contraction seems in order.

On the conference call, analysts will ask about a potential bid for Univision (UVN), the transition of UPN to the CW network, use of free cash flow including share repurchases, dividends, and acquisitions, and the status of retransmission payment negotiations.

Management will strongly defend their business and do so competently. Les Moonves and Fred Reynolds are a top quality team and their ability to manage the business well and get the stock price moving should be respected.

I am not sure where I come down on CBS. I don’t own the stock but I limit my individual stock holdings severely in my ETF centric strategy so my hurdle rate is high. If I had to chose, I'd go against conventional wisdom and say the shares will underperform. I can see how some of the revenue opportunities will work out but I think the CBS Network is probably at its high point and the risk is too downside. Any weakening at the network would punish the financials due to the operating leverage in that business. As of now, there is no sign the network will weaken, although growth above current levels is not expected either. I also see radio in a long-term state of decline. These risks outweigh the upside opportunities the strong management team is likely to secure.

As a caveat, I think that if media stocks came back in favor in 2006, CBS would probably be a leader given its support from the sell side and accelerating growth profile through the year.

Posted by Steve Birenberg at April 25, 2006 03:32 PM in CBS