CBS reported most inline results for 2Q15 with a bias slightly above Wall Street estimates.  In a rough week for media stocks due to cord cutting fears triggered by Disney’s report, CBS share held up much better than average.  Northlake agrees as CBS is much less exposed to cord cutting fears than other media stocks.  With operating income growth expected to resume starting in the December quarter and a very strong 2016 outlook (Super Bowl, political, retransmission fees, content sales), CBS shares appear to be a good value after a sharp pullback over the past month.

Disney triggered a big sell-off in media stocks last week when it lowered its forecast for its cable network group due to cord cutting that has led to lower than expected subscriber counts at ESPN.  CBS has very limited exposure to cord cutting given that it only has one broadcast network and a premium pay network in Showtime.  The CBS Network is extremely likely to be included in any over-the-top streaming services or skinny channel bundles that households may purchase in lieu of a 500 channel TV package.  Some lost subscribers will occur if households drop multichannel TV altogether and get by just on services like Netflix and Hulu that do not include traditional TV networks.  This should be manageable for CBS and management actually raised its 2016 and 2020 outlook for retransmission fees paid on a per subscriber basis by cable and satellite companies to CBS for the right to carry the network.

Lack of operating income growth has been a reason why CBS shares have been sluggish performers since early 2014.  Northlake expected the massive share repurchases and sale of the company’s billboard business to appease investors.   This has not been the case but after a couple of years when tough comparisons to political advertising and off network content sales stymied operating income growth, 2016 is poised to be a big year.  After one more tough comparison in 3Q15, growth at CBS should resume.  Along with a realization that CBS has limited exposure to cord cutting fears, we believe renewed growth should allow the share to recover to the $60 area.  CBS could also be part of a new wave of mergers and acquisitions given the strategic value that owning the leading broadcast network brings.

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.