CBS reported a good quarter beating consensus EPS estimates comfortably with small upside in revenues.  The implication is good performance on profit margins and that was indeed the case especially in the core entertainment assets (CBS Network and content production) and the local TV stations.  Advertising drove the upside, with a gain of 31% exceeding expectations.  It was a strong quarter for advertising but the Super Bowl drove the outsized gain.  Normalizing for that the gain was about 12%, still easily outperforming all peers.

We have stuck with CBS despite the turmoil in media driven by concerns about cord cutting and declining ratings because we believe that it is the best media positioned company to withstand these secular challenges.  CBS has only one meaningful network that is reliant on advertising and affiliate fees and that network has been #1 for years and controls much can’t miss content such as the NFL and NCAA basketball and the Emmy Awards and hit shows like Big Bang Theory and NCSI.  CBS is unlikely to be excluded from any traditional or new bundle and the fees it receives still leaves it underpriced relative to the ratings it delivers.

CBS is still more exposed to advertising than most other media companies.  However, management has steadily diversified and is in the process of exiting the radio business.  At that point advertising will be about 40% of revenues, down from 70% less than ten years ago.  At the moment, TV advertising markets are quite strong even with online advertising gaining share.  The dichotomy of strong advertising and weak ratings may not last forever.  We are confident that CBS has one of the best management teams on the creative side as evidenced by its consistent victory in the ratings wars over the past 15 years.

CBS has also been in the news recently as its controlling shareholder, Sumner Redstone, suffers from ill health and court battles over his competency.  CBS management has made it clear it would like to purchase the control stake from Mr. Redstone’s holding company, National Amusements.  This would be a big bonus for shareholders but not something for which we are holding our breath.

We have not talked much about the quarter as little changed beyond increased confidence in the outlook for CBS in 2016 and 2017.  Based on EPS of $4 in 2016 and $4.30 in 2017, we think CBS can trade in the mid-$60s, providing almost 20% upside over the next 6-12 months.

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.