CBS reported fourth quarter results largely in line with analyst estimates.  After a tough year in 2014 when operating income fell and estimates declined steadily, reporting results merely as expected provided a sense of relief.  Furthermore, management commentary on 2015 trends was confident and a little more positive than investors were anticipating.  All of this added up to a relief rally in the stock, extending early 2015 gains, and recouping quite a bit of 2014’s -13% decline in the shares.

Large TV network owners are facing many challenges as viewers spend more time with on demand viewing and increasingly popular over the top options like Netflix and Amazon Prime.  There is also a lot of fear about households cutting the cord for pay TV or shrinking their programming packages from the cable and satellite and companies.  Investors are particularly concerned about longer term trends as millennials may be “cord nevers” unlike prior generations who ultimately purchased pay TV subscriptions as they established households and families.  Taken together, the fear is lower ratings and fewer households paying affiliate or retransmission fees via their multichannel TV provider.

CBS is one of the best positioned companies to deal with and thrive in the changing TV landscape.  First, the management team, led by Les Moonves, is one of the best in the business, balancing creative expertise, corporate strategy, financial discipline, and shareholder friendliness.  Second, the broadcast TV business is less pressured by the evolving TV landscape than cable networks and CBS is almost dominated by its flagship CBS Network.  Third, the company has leading OTT option in its premium pay TV network, Showtime.  Much has been made of the rivalry between HBO and Netflix and the shareholder value each has created.  Showtime is a legitimate rival to both has been gaining share of TV viewing with many popular programs.  Finally, CBS produces a lot of content for the CBS Network and Showtime.  While the TV economic model may be fraying, one area that is growing rapidly and contributing to the challenges is a massive increase in TV content production.  CBS has recognized this for years and is a leader in creating TV content and monetizing it in traditional and emerging distribution channels.  Part of the reason CBS operating income fell in 2014 was a large increased investment in programming.  Management has proven its ability create shareholder value by investment in programming. CBS’s pipeline is being filled nicely in 2014 and 2015, setting the stage for a resumption of growth in 2016.  In the meantime, aggressive share repurchase continues, supporting EPS growth and the stock price

At a P-E of under 14, CBS shares look particularly cheap on 2016 estimates when programming investments, share repurchases, political advertising, and broadcast of the Super Bowl should lead to renewed growth in operating income and a surge in earnings per share growth.  For 2015, stabilizing estimates, a modest improvement in advertising trends, and still poor investor sentiment provide support for the shares.  CBS shares can work back to the mid-$60s over the next 6 months and higher if as we expect confidence builds in the 2016 outlook.

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 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, communications, leisure, and related technologies.  Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s investment management company.