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November 10, 2014

Signs of Bottoming at CBS

CBS Corporation (CBS) reported third quarter results in line with or very slightly ahead of recently lowered Wall Street estimates. CBS shares have performed quite poorly this year, down almost 20%, as earnings have steadily fallen due to weaker than expected advertising trends at the CBS Network and the company’s owned and operated TV stations. In addition, investors are worried about a collapse in the TV network business model if TV begins to be delivered via the internet (over the top or OTT) rather than through the cable or satellite set-top box. CBS shares have also probably been a victim of high expectations as the stock entered the year up about 10 times from the summer of 2009 when Northlake first began buying the shares.

I had hoped that the current quarter would set a bottom for the shares if the quarter served to stabilize estimates. My hope was only partly rewarded. Earnings were pretty solid against lowered expectations, a good first step. However, TV advertising, particularly at the CBS Network was a little weaker than expected, especially considering the benefit of the broadcast of September’s Thursday night NFL games. Management did signal better ad trends in the current quarter but many other TV networks have stated that the TV ad market is still sluggish at best.

One positive coming from the quarter is that for the first time ever advertising revenues as a percent of total company revenue fell below 50%. CBS is among the most exposed companies to ad trends since it does not own cable networks that get a large portion of their revenue from monthly affiliate fees paid by cable and satellite companies for the rights to provide the network signal to their customers. CBS is beginning to receive fees from cable and satellite companies for the rights to its main network and management reiterated the growth path of this revenue stream over the next five years. Another factor lowering ad exposure is the big success at Showtime and CBS selling its content to other networks in the U.S. and abroad and to OTT providers like Netflix. The potential to sell Showtime OTT, as HBO has announced, could be a positive spark to the shares.

Overall, I think it pays to stick with CBS. Some signs that TV advertising growth has bottomed, a better advertising outlook on lower expectations for 2015, possible hidden value at Showtime, and continued strength in monetization of TV content should capture investor attention over the next few months and return CBS shares to favor. If earnings estimates have indeed bottomed and advertising growth picks up, CBS shares offer 20-30% upside over the next six months. Supporting the stock in the meantime is an aggressive share repurchase plan and one the best management teams I know of in any industry.

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. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Posted by Steve Birenberg at November 10, 2014 10:30 AM in CBS