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November 12, 2013

CBS Lacks Usual Upside But Upside Intact

CBS reported solid but unspectacular third quarter 2013 results. EPS matched Wall Street consensus of 76 cents, up from 64 cents a year ago. Revenue grew 11% but EBITDA was up only 4%. Revenue was a little ahead of estimates, while EBITDA fell slightly short. Unlike many recent quarters, CBS did not show an upside earnings surprise. CBS shares retreated following the report although the decline came amid a large sell-off in media stocks on a very poor day for the market.

CBS shares have performed exceptionally well and the bar was set very high for this quarter’s earnings report. High expectations probably had more to do with the pullback in the shares than the results. This has an issue throughout the media stock universe this quarter. At Northlake, we are focused on the fundamental operating prospects of a company’s business. In this regard, we find CBS remains well positioned with a less cyclical business mix and higher margins driving consistent return of capital to shareholders. A target in the upper $60s based on 20 times 2014 earnings estimates provides 20% upside and strongly supports continuing to own the shares.

The third and fourth quarters face difficult comparisons due to heavy political advertising in 2012, particularly at local TV stations. CBS also faces higher spending on programming as successful original programming is more critical than ever to sustain advertising growth and lock in higher retransmission fees. Fortunately, current ad trends remain strong at the local TV stations and national TV networks, with auto, communications, and other major categories picking up the slack from political.

In the third quarter, CBS did pull forward some revenue that probably overstated the results relative to expectations. In turn, fourth quarter estimates fell slightly. This may keep upside in the shares in check until further evidence of advertising gains appears or investors turn their attention to what is shaping up as a very strong 2014 with a return of political advertising, the spin-off of the Outdoor business, and another massive accelerated share repurchase. As long as U.S. economic growth remains sluggish but positive momentum, I think the upside in 2014 at CBS is worth waiting for.

CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s 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, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.

Posted by Steve Birenberg at November 12, 2013 08:39 AM in CBS