We have held off for a few days writing up the 2Q19 earnings report from CBS.  It appears the company will finally announce its merger with Viacom and we wanted to wait and cover both events in one post.  The merger has been in the works in one form or another for several years.  Deal terms appear very close and management structure has been agreed according to press reports.  Key to the future action in CBS stock, the surviving entity, is the final exchange ratio of CBS shares for Viacom shares and more importantly the strategic plan laid out for the new enlarged firm.  How far the company goes in shifting to an OTT, internet TV future and the costs of the strategy will be key factors.

Here are a few brief comments on CBS’s 2Q19 results.  We will keep these comments limited since the newco outlook is much more important for CBS shares.  CBS reported mostly in line with Wall Street estimates.  Analysts generally found the quarter to be a good one although the stock moved lower.  The issue appears to be future spending on programming as CBS ups investment in its OTT services at Showtime and CBS All Access.  The impact of the strategy was evident in the quarter with total revenues up 9.8% with advertising, content licensing and distribution, and affiliate and sub fees all up between 7% and 13%.  Margins compressed however from 21.6% a year ago to 19.8% this year due to the programming investment.  Thus, operating income grew just 1% as it also did in 1Q19 when revenues grew 10.8%.

Investors are willing to accept heavy investment for the future in media as evidence by the strongly positive reaction at Disney when that company went all in on internet-delivered TV.  CBS does not have the scale or brands to follow Disney’s path and that is one reason merging with Viacom makes sense.  It is still unclear what strategy the new company will take.  We are willing to hear what the new management says when the merger is announced, probably within the next 24 to 48 hours.

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.