Despite reporting another solid quarter in line with Wall Street expectations, CBS shares remain in a tough spot.  The shares trade at 9X 2019 estimated earnings, barely more than half of the market multiple.  The overhanging issue, which has been so for over a year, is a potential merger with Viacom.  More recently, the company lost its CEO to a sexual harassment issue.  Both of these headwinds complicate concerns over cord cutting and falling TV ratings.

Given this litany of challenges, why does Northlake continue to own CBS shares?  Mostly, we think the stock is too cheap.  We are not fans of the Viacom merger because we see better merger opportunities elsewhere.  We do see the need for scale and on a purely financial basis a Viacom merger is very highly accretive to earnings and cash flow.  Management has not been sitting still.  The company was an early entrant into OTT streaming and has two successful services in Showtime and CBS All Access.   Recently, management has scaled back on share buybacks to invest in more content for these services and to improve the balance sheet.  Today, CBS spends about $8 billion a year on content and supplies TV shows to its own networks along with Netflix and many other traditional outlets in the US and abroad.  Even lacking the scale of Netflix or Comcast, this is a competitive level of content spending.

Finally, the company’s narrow set of assets actually positions it well in the changing world of TV.  Unlike many peers, CBS does not have to defend TV networks that consumers have little interest in.  This means investment can be focused on networks that are distributed in every traditional and digital distribution service.  The dominant network is CBS.  Here the company still a lot of growth potential as the retransmission fees it charges to distributors continues to rise at a double digit pace offsetting any lost distributions due to cord cutting.

We anticipate a resolution on the Viacom merger and CEO search will occur before the end of 2019.  With clearer skies, we think the stock can rebound toward $60 or more.  It has been a long painful wait for better performance from CBS shares but with catalyst in the next few quarters we think the best course of action is to continue to wait.

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.