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November 02, 2006

CBS: Lack of Growth Offsets Cheap Value and Financial Strength

CBS Corporation (CBS) reported 3Q EPS that mostly matched street expectations. EPS of 42 cents were 2 cents above consensus but revenues of $3.38 billion fell about $50 million short of estimates. EBITDA results were favorable, up 3%, a little ahead of expectations for a 1% gain.

With revenues short of expectations and EBITDA above, the story in the quarter was good expense control. This appears to be the case particularly in the TV segment where a 9% EBITDA gain was achieved on flat sales that were under expectations for a 1% gain. Lower than expected programming expenses were cited in the press release. EBITDA in Radio was down 10% on a 6% revenue decline. Outdoor performed well with revenues rising 6% and EBITDA rising 20%....

Within the TV segment, syndication, political advertising, and affiliate fees all grew mid to upper single digits. However, advertising growth was -3%. Management attributed the advertising decline to the closing of UPN and the lack of the Emmy Awards show this year. However, a couple of analysts, most notably Anthony Noto of Goldman Sachs, pressured management to amplify on the weaker advertising trends, especially in light of some weakness in CBS' primetime schedule. I was pleased to see this interaction. Les Moonves has proven himself as a great media executive but he has a tendency to look at the bright side of everything. I remain concerned that the CBS Network has peaked and at best will offer no growth over the next few years. The TV segment is by far the company's largest and lack of growth in the segment will severely limit the company's overall growth rate.

Radios aw nothing unusual. Weak industry trends plus the impact of Howard Stern's departure continue to pressure results. Comparisons ease next year and management noted that the non-Howard Stern stations had a 1% advertising gain in the quarter, which would be better than industry growth.

Outdoor continues to benefit from industry trends and margin expansion as high cost transit contracts roll off. The big gain in EBITDA was also helped by easy comparisons against last year's hurricane impacted quarter. Margin expansion will slow or cease in 2007 bringing EBITDA growth in line with revenue trends.

CBS is slightly cheaper than most other media stocks but I think the lack of growth potential in operations supports the discount. 2007 should see TV trends remain flattish, a recovery in Radio, and moderating Outdoor growth. Overall, the outlook is for low single digit growth in revenue, EBITDA, and operating income.

For me, that is not enough to justify owning the stock even with high free cash flow generation, a steadily rising dividend, renewed share repurchases, and over $3 billion in cash on the balance sheet. I believe that 2006 performance across the media secotr shows that investors will only bid up large cap stocks that are showing growth (DIS, NWS, CMCSA). CBS has one of the worst growth profiles which limits upside in the shares despite financial strength.

Posted by Steve Birenberg at November 2, 2006 09:31 AM in CBS