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April 29, 2008

CBS: Another Unimpressive Quarter

CBS shares popped nicely upward following its 1Q08 earnings report. Results exceeded analyst estimates and were accompanied by an 8% dividend boost. Despite the better than expected results, management only reiterated guidance. Either they are playing it conservative or they are implying that trends for the remainder of they ear may be a little below plan. The dividend increase suggests they are being conservative and the stock action indicates this is what investors believe.

Despite the positive reaction, I was not impressed by the results. EPS of 40 cents did beat consensus for 34 cents and flat revenue and 8% EBITDA growth were also better than expected. However, the source of the upside surprise was low quality. First, costs were lower, boosting free cash as well, due to the writer's strike. This was a commonly discussed topic during the strike but apparently analysts did not incorporate enough savings into their models. Second, syndication sales of CSI and Everybody Loves Raymond drove this division to an 85% revenue gain in a high margin business. CSI benefited form a shift form outside to inside distribution while Raymond sold a few more seasons. CSI may prove repeatable assuming analysts had not placed the distribution shift in their models. Raymond appears to be a timing issue with anticipated revenues being pulled forward.

Away from these positive surprises, trends were lackluster....

....Adjusting for CSI, Raymond, NCAA hoops, and the Super Bowl, total TV revenue was up just 1%. TV station revenues fell by upper single digits reflecting weakness seen at other TV station groups which have already reported. TV Network revenue was probably barley negative after adjustments for sports. Radio remains awful with same station revenue falling 6% and EBITDA down 20% as content related expenses rise.

One other problem may be emerging in the company's only growth business with a material financial impact. Outdoor had just 7% revenue growth with the US coming in at just 3%. EBITDA was up just 1%. International likely slowed to single digit growth excluding foreign currency benefits. Management cited some lost contracts in the US as the culprit but other outdoor companies have also witnessed a sharp slowing from double digit growth. It seems that the traditional media advertising slump may have finally reached billboards.

CBS shares are inexpensive on a P-E, EBITDA, and free cash flow basis and sport a 4.7% current yield. I don’t much downside from here. CBS has fewer growth prospects than other diversified media companies so it deserves to trade cheap. Furthermore, I remain concerned that the several hundred million dollar profit stream at the CBS Network could disappear quickly given past precedent when the top ranked network fell off its perch. CBS ratings trends are the worst among the big four broadcast networks.

Posted by Steve Birenberg at April 29, 2008 01:24 PM in CBS