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September 26, 2012

Trimming CBS at Initial Price Target

CBS has been a huge winner for Northlake clients. Initially purchased in the summer of 2009 near $6, the stock has soared thanks to great ratings at its CBS and Showtime networks, excellent cost management, and aggressive share buybacks and dividend increases. The addition of retransmission fees paid to CBS by cable and satellite companies has added a growing and predictable high margin revenue stream that makes CBS look a lot more like the other big entertainment companies that historically have traded at a higher valuation. CBS is now less cyclical, less reliant on advertising, and more diversified. The result of fantastic operating trends, superior capital allocation, and a faster growing, more stable business model has been an expanding valuation on rapidly rising earnings and cash flow. It all adds up to the shares rising from $6 to $36.

Long ago, I set a mid-$30s price target on CBS in a best case scenario. I set price targets on every stock I buy for Northlake portfolios. As part of Northlake's disciplined investment strategy, I trim positions when price targets are reached. This was the case with CBS, which I trimmed yesterday at $36.70. Fundamentals at CBS are clearly better today than when I set the mid-$30s price target. My latest analysis suggests the stock can reach the mid-$40s if the company meets expectations over the next year. Nevertheless, disciplined portfolio management trumps rising price targets and cutting back the CBS position from an overweighted to a normal weighted position is the prudent decision.

Looking ahead, the primary risks to CBS are weaker advertising markets related to slowing economic growth and declining prime time ratings at the CBS network. I don't currently expect either of those risk to emerge. However, at $36, the risks are higher, and the risk-reward trade-off in the shares in less attractive. Upside to the mid-$40s still merits an investment in CBS, just at a lower level than previously.

Disclosure: CBS is widely held by Northlake Capital Management LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a long only registered investment adviser. Northlake regulatory filings can be found at www.sec.gov. CBS is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, communications and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the funds' investment management company and has personal monies invested in the funds.

Posted by Steve Birenberg at September 26, 2012 09:20 AM in CBS