CBS continued its pattern of reporting modest growth against the tide of change in the TV business.  3Q18 revenues grew 3% with EPS advancing 11%.  Operating income grew only 1% as the company continues to benefits at the EPS from large share buybacks and the reduction in corporate tax rates.

CBS shares have stalled the past couple of years due fears about cord cutting, weak TV ratings, and the prospect that critical sports rights will get much more expensive in the future as tech companies like Google, Amazon, and Facebook make bids.  EPS growth has been fine but like in 3Q18, operating income has not grown much.  This has left investors asking how the company can grow in the future given the challenges and the limits to financial engineering.  In addition, ongoing speculation about CBS being forced to combine with Viacom (the two companies have the same controlling shareholder) has muddied the future growth strategy.

These questions faced renewed importance following the forced departure of the company’s long-time well-regarded CEO Les Moonves under a cloud related to sexual harassment allegations.  Mr. Moonves long serving #2, Joe Ianniello is now interim CEO at CBS as the Board considers him and others for the permanent job.  Joe is also well thought of by us and the street.

3Q18 marked Joe’s first opportunity to handle investors by himself and present his vision for the future of CBS.  The company announced (1) a third OTT service based on in its Entertainment Tonight brand, (2) expansion of current OTT product All Access to Australia, (3) new deals to take its digital news network, CBSN, to virtual MVPDs like Hulu, and (4) noted it is building on its strength as a TV producer with 76 series in production, up 17% from a year ago.

These initiatives were well received by investors and the shares have been stable near 2018 highs, albeit down a few percent for 2018.  With estimated EPS of $5.25 and almost $6.00 in 2018 and 2019, respectively, at $57 CBS shares are inexpensive.  This is cheap enough for Northlake to hold but until we see signs that the strategic initiatives are improving operating income growth, we do not expect a major upward move.

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.