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February 14, 2014

CBS Keeping Its Bullish Eye

CBS reported another healthy quarter and provided reassuring commentary on the near-term and long-term outlook. Revenues grew 6% and segment level operating cash flow grew 7%, both ahead of expectations. Advertising at the CBS Network grew 4%, better than feared given concerns over ad demand and pricing that arose following the government shutdown. Management noted that current ad trends look good adjusting for tough comps (Super Bowl and more NCAA March Madness last year) and headwinds (Winter Olympics on NBC).

CBS also announced an accelerate share repurchase of $1.5 billion related to the pending spin-off of its Outdoor advertising business. The Outdoor division borrowed money which it upstream to CBS. In turn, CBS used virtually all of the proceeds to buy back stock immediately. Further reduction in the share base will come later this year when Outdoor completes an exchange offer with its former parent. In addition, the company remains committed to using free cash flow and appropriate debt leverage to buyback $2 billion in shares per year. While earnings per share is only measure upon which to value a stock, CBS capital allocation strategy led to a 22% boost in EPS in the latest quarter and plenty more where that came from lies ahead in the next few years.

Another bullish development was management raising and extending its guidance for retransmission fees. These are the fees that cable and satellite and telco companies pay to CBS for the right to carry the network on their multichannel TV services. CBS also gets a share of the retransmission fees that multichannel TV service providers pay to local affiliates of the network. CBS is now saying these fees, with virtually a 100% profit margin, will reach $2 billion in 2020 vs. prior guidance of $1 billion in 2017. One analyst calculated that retrains fees alone can drive 5% annual growth in operating profits through 2020.

With all this good news, CBS shares rose about 5% since reporting earnings, reaching a new all-time high. I think more upside remains as the multiple can still expand against the rapid earnings growth with CBS becoming a less cyclical company – headed to 50% advertising/50% subscription and content. I think earnings are headed north of $4.00 in 2015. A high-teens multiple, in line with peers, would put the stock in the mid to upper $70s. That is 20% upside, enough to continue holding the shares.

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 regulatory filings can be found at www.sec.gov. CBS is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Posted by Steve Birenberg at February 14, 2014 02:57 PM in CBS