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April 26, 2006

Solid Quarter From CBS

CBS (CBS) reported better than expected 1Q06 earnings. The shares are not responding indicating that strength in the stock over the last few days anticipated the results. Also, CBS did not raise its 2006 guidance from "low single digit revenue growth and mid-single digit growth in operating income and EPS." Given the better than expected 1Q results this implies that some portion of the outperformance is not sustainable through 2006. I suspect management wants to see the results of the upfront and the impact of recent changes in radio personalities before it would adjust its guidance.

CBS reported EPS of 30 cents against consensus of 27-28 cents. Revenues came in at $3.58 billion against estimates surrounding $3.5 billion. Television and Parks/Publishing beat on revenues, while EBITDA was better than expected at Parks/Publishing and Outdoor. Profitability at Outdoor was the star of the quarter and seems to have accounted for the bulk of the EPS surprise.

Radio did poorly as expected due to weak industry trends exacerbated by the loss of Howard Stern. Management noted that non-Howard stations saw revenue declines of 1.5% against a decline of more than 5% for the fully station group....

Analysts were impressed by better than expected free cash flow and queried whether this trend was sustainable and what the company planned to do with its free cash flow. Parks and some radio stations are for sale so the balance sheet is going to be underleveraged by year end. Lower taxes appeared to play apart in the free cash flow surprise as did the positive surprise at the EBITDA level. Management said a dividend increase is in the works and that share buybacks are strong possibility. A large acquisition, specifically Univision (UVN) was ruled out but smaller deals are definitely a possibility.

One concern I have is whether the CBS Network can show hold its recent gains in revneu and operating profit. Revenue in Television in 1Q surprised to the upside with syndication of Frasier, affiliate compensation, and TV stations being credited. This implies a weak quarter at the Network. This was anticipated due to competition from the Olympics. Management said that 2Q trends were bouncing back as expected. The health of this year's upfront will be key to the outlook for the network. I expect CBS can hold its own but growth will be hard to come by from the network with ABC and FOX on the rise and NBC unlikely to get any worse.

CBS shares are trading at a discount to other entertainment stocks. I think CBS has a lower growth profile so I believe the discount is warranted. Free cash flow is a positive but I think growth concerns will win out limiting the upside in the shares.

Posted by Steve Birenberg at April 26, 2006 09:07 AM in CBS