CBS is performing well compared to other TV centric media companies.  Smart management decisions have the company building a successful presence in in OTT video with Showtime and CBS All Access.  A strong lineup of sports and marquee entertainment event programming like the Grammy’s is keeping advertising to low single digit declines even as prime time TV ratings fall double digits.  More importantly, the must-have programming allows CBS to gets its network on all new OTT services and charge higher prices to cable and satellite companies and its own affiliates for access to its programming.

Operating income is poised to grow 7% this year, and 10% next year.  EPS, fueled by aggressive share buybacks, will grow 19% in 2018 and 14% in each of the next two years.  The balance sheet is in good shape with debt leverage a manageable 3X EBITDA.  The latest quarterly earnings report was a little better than Wall Street expectations and management raised guidance for subscriber growth at its OTT business.  The stock trades at just 10X 2018 estimated earnings and less than 9X 2019 consensus estimates.

So what’s not to like?  The highly regarded CEO, Leslie Moonves, is subject to a sexual harassment investigation after a damning report in the New Yorker by the same journalist that broke the Harvey Weinstein story.  At the same time, led by the CEO, the Board is suing the company’s controlling shareholder that has overwhelming voting control in an attempt to invalidate the super voting stock.  This move is related to the Board’s view that the National Amusement, the Redstone family holding company, is attempting to force CBS into an unwelcome and value destroying merger with the family’s other controlled media company, Viacom.  These two intertwined issues leave massive uncertainty as to the future management, strategic, and financial direction of CBS.  The timeline for resolution of the CEO investigation and courtroom fight could extend until late fall.

So where does that leave CBS stock?  Probably in purgatory with a bias lower in the near-term.  No doubt there is value in the shares and as long as the stock market holds up and earnings meet expectations we see limited down from current prices, maybe 10%.  Favorable resolution of the issues leaves 30% upside, perhaps more if the easiest way out for the Redstone family to sell CBS and Viacom to the highest bidder.

For right now, Northlake is holding CBS but our bias is to look for a better opportunity pending further developments.  One harsh lesson for Northlake over the last few years is that cheap valuations, even remarkably cheap valuations, do not provide upside for media stocks short of unpredictable mergers and acquisitions.  CBS is a particularly difficult case given the conflict between relatively strong fundamentals and the Boardroom drama.

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.