CBS reported worse than expected 1Q09 results with EPS, revenue, and EBITDA each below estimates. However, Les Moonves spoke about improved advertising trends in the last few weeks and said “indications are we’ve seen the bottom of this downturn.” These comments echo those from Disney (DIS) and News Corporation (NWSA) when they reported earlier this week.
The company provided full year guidance for EBITDA for the first time and the numbers are in line with analyst estimates. Given the very poor first quarter (just 14% of the mid-point of EBITDA guidance was produced) and commentary indicating that 2Q trends will not be much stronger, the implication is that current signs of improvement in advertising will kick in the second half. It is worth noting that CBS has one advantage on its peers: the CBS Network is having a good year with positive ratings and thus has something to sell advertisers.
The biggest weakness in the quarter relative to expectations was at Outdoor and Publishing. Outdoor has unusually weak margins, which was explained via the high fixed costs of the billboard business. Publishing saw EBITDA disappear. IT is not a big segment but the miss was enough to make a difference.
TV results are in line. 1Q does not really matter if ad trends turn up. CBS is disproportionately exposed to local TV advertising so commentary that there has been some improvement is hopeful. NWSA said the same thing.
Despite the weak results with revenue down 13% and EBITDA down 61%, the company still produced $204 million in free cash flow.
Management stated that they can self-fund debt maturities for the next three years including $1.2 billion in 2010, $950 million in 2011, and $825 million in 2012. The $3 billion bank line expires at the end of 2010. With free cash flow over $1 billion annually at what may be the bottom of the cycle, this is a reasonable assumption. However, management indicated that it would issue new debt and extend maturities if credit markets remain open over the next few months.
Refinancing of the debt, including a new bank line, is going to raise interest costs dramatically and hurt EPS and free cash flow. The shares will trade on the basis of free cash flow, EBITDA, and advertising trends. The outlook seems improved, especially if comments on ad trends are accurate. However, the stock is no longer super cheap at 7 times EBITDA.
I exit the quarter feeling better about CBS as a possible long but not at current prices.