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August 03, 2006

CBS: Cheap But No Momentum

CBS Corporation (CBS) reported 2Q06 results very close to expectations and reaffirmed guidance for 2006. Nevertheless, the shares are dropping sharply. I think there could be two reasons for the decline. First, the company did not indicate how it was going to use proceeds of recent asset sales. Investors were expecting a big increase the share buyback. In fact, management noted on the call that under certain deal structures future sales of radio stations might prevent the company from buying back stock while during the period form announcement of the sale to closing. Second, advertising revenue growth at the TV stations, in particular, the CBS Network, were weak in the quarter, falling in the very low single digits. This is probably less of a short-term factor although in the long-term the health of Network is critical to the stock....

CBS reported adjusted EPS of 50 cents, exactly matching consensus. Revenues were a little light but I don’t see that as material. EBITDA fell about 4% after adjusting for accounting for the sale of Paramount Parks, also exactly in line with consensus.

Trends at the segment level also closely matched consensus estimates. TV revenues were flat with a small decline in EBITDA. TV faced a tough comparison due to DVD sales a year ago. Radio continues to feel the pressure of poor industry trends and the loss of Howard Stern. Radio saw a revenue decline of 8% with EBITDA dropping by 19%. These results light have been a little worse than some analysts were expecting. Outdoor remains the star producing an 8% revenue gain and a jump of over 30% in operating income.

In non-financial commentary on the call, management talked extensively aobut how muchinterest they are receiving int eh radio stations that are up for sale. Expect to see announcements soon but beware of deal structure given the comments that it could impact the timing of share buybacks. There were also questions about ad trends at the CBS Network. In my opinion, ad revenues were below expectations. Given my concerns that have ratings and profitability at the CBS Network have reached a plateau this is troubling news, especially for the long-term. Management stated that further acquisitions would be on the small side and continued to discuss their intent to produce a half dozen movies a year. Finally, free cash flow was again very strong in 2Q and 1H FCF looks like it is tracking way ahead of analyst estimates. Management cautioned that 2H cash flow is generally seasonally weaker as costs for key sports programming and production cost for the fall TV season kick in.

Overall, 2Q confirmed my belief that CBS is cheap for a reason: lack of identifiable growth. I still feel that risk remains to the downside in terms of financial performance which more than offsets likely share repurchase and asset sale announcements.

Posted by Steve Birenberg at August 3, 2006 11:34 AM in CBS