After a year of negative operating income growth and falling earnings estimates, CBS is back on track.  The recently reported 4Q15 showed operating income growth of over 6% and for the first time in nearly two years, analysts maintained their earnings estimates.  2016 sets up very well for CBS with a stronger national TV adverting market, political and Olympic ad spending, the just announced better than expected growth in high margin retransmission revenues, and a shift form losses to profits for CBS’s new over the top services, CBS All Access and Showtime OTT.

The combination of CBS’s negative growth in 2015 and the collapse in media stock valuations leaves the stock at just 11x earnings as the company enters a period of accelerating growth.  Furthermore, the main issue troubling media stocks, cord cutting and cord shaving, has minimal impact on CBS.  CBS owns no cable networks.  Showtime is a premium network with different economics and is growing is subscriber base and launching an OTT product.  Showtime is akin to HBO and Netflix not a basic cable network like ESPN or Food Network.  The main CBS Network is going to be part of any bundle purchased given its broad reach and popular sports and entertainment programming.  Management had good foresight to control the rights to its programming, enabling the launch of CBS All Access as both a growth vehicle and a hedge against cord cutting and cord shaving.  With one of the best creative management teams and the #2 TV production studio, CBS has the potential for success in its digital ventures.

Northlake sees CBS’s resiliency and 2016 growth outlook as undervalued by investors.  We expect nerves to calm and the multiple to expand to a more reasonable 13X,leading to a price target in the low $50s, about 25% above recent prices.  It has been a painful ride and we were probably overly patient with this great management team, led by Les Moonves, but with an improving outlook now is the time for our patience to be rewarded.

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.