CBS reported a mixed quarter against low expectations.  The highlight of the quarter is the company is returning to growth on the operating income line with a big accelerating ahead on 2016 on the back of political advertising.  CBS shares have perfomed poorly this year as earnings estimates moved steadily lower.  At one point, Northlake felt that CBS could earn $4.65 in2016.  That now looks more like $4.00.  Weak TV ratings, a lesser number of shows sold into syndication, and advertising declines impacting all TV companies have led to reduced expectations.  It appears the worse is over as several of these trends are stabilizing or reversing and for the first time in recent memory CBS reported earnings and Wall Street analysts did not reduce their estimates.

We have stuck with CBS because the company is very shareholder friendly with buybacks and dividends and because the company is relatively well protected from fears about cord cutting and cord shaving.  CBS remains the most popular network in America and is included in all the skinny bundles of less TV channels being offered by cable and satellite companies or OTT providers.  This means that CBS has mostly locked in a ramp in revenue and profit contribution as retransmission fees escalate over the next four years.

We are also pleased to see CBS as a leader among traditional TV companies in testing ideas for the new digital age of TV.  The company offers CBS All Access and Showtime as OTT services and has launched on online only news service.  As a leading producer of TV shows, CBS is also well positioned to benefit from demand for new TV shows that is coming from OTT providers like Netflix and Hulu.

CBS shares look cheap at 12X stable 2016 earnings estimates.  We think a couple quarters of stability are enough to allow the multiple to expand and drive the shares higher.  We have been overly patient with CBS in the past year but 2016 sets up well so it is worth hanging on for at least a little longer with the support of the best management team in the business.

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.