CBS reported another excellent quarter, showing solid growth even against tough comparisons and declining ratings at the flagship CBS Network. Revenues grew 6%, slightly ahead of expectations. Excellent cost controls and a positive mix shift led to a 15% gain in adjusted operating cash flow, the most important financial measure for media investors. Extremely aggressive share repurchase activity over the past year accelerated in the first quarter. With shares outstanding down about 5% year over year, EPS rose 23%. The company spoke confidently about the balance of 2013 and street estimates and price targets are inching higher. Even after massive gains in the stock price since 2009, I think CBS shares have more upside, at least to the mid $50s this year.
Looking ahead, CBS will benefit from positive revenue growth for the CBS Network in next fall’s TV season triggered by leadership in this month’s upfront ad sales market. More importantly to the story, the company appears on track to separate its Outdoor billboard business around year end. This transaction should allow another accelerated share repurchase program while also reducing the company’s exposure to cyclical advertising revenue. In turn, expansion in the stock’s multiple should follow. CBS shares still trade at a discount to other TV networks stocks even as the company’s financial and business model looks more and more like its peers. One final positive is the company’s leading position as a television producer. Demand for content around the globe and through new devices and delivery mechanisms are causing a renaissance in the TV production business. TV is better today that it has been in years and CBS is a leading supplier of content, second only to Time Warner’s Warner Brothers.
Strong management and a commitment to returning cash flow to shareholders makes CBS one of the best investments in media. With EPS heading toward $3.50 in 2014, a P-E of 16 would get the shares to $56, representing 20% upside. The stock also pays a dividend of $1.00 that should grow materially over the next several years.
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.