Inside Wall Street: CBS a content pure-play

The media-entertainment gaint's tiff with Time Warner fails to faze Wall Street investors.

By Gene Marcial Aug 13, 2013 1:33PM

 copyright Klaus Tiedge, Getty Images, Getty ImagesWhether it's a sum-of-the-parts valuation or one based on earnings and revenue stream, CBS (CBS) remains one of the favored choices of Wall Street -- if not its top pick in the world of media and entertainment.

With diversified interests in broadcast and cable television networks, radio and TV stations, plus outdoor advertising and book publishing, CBS has climbed up the industry's slippery totem pole. And Wall Street applauds what it's been witnessing.

"CBS remains our Top Pick as it offers a combination of long-term fundamental acceleration given trajectory on retransmission/reverse comp, broader content monetization, as well as financial value creation," says David Bank, analyst at RBC Capital Markets.

He notes that CBS's planned split-off of its outdoor advertising business (and projected IPO) and "subsequent returns that could reach $9 billion in the next two years" is an example of the value creation that the company is pursuing.

CBS's entertainment business has exceeded Wall Street's expectations. The company's solid results in the second quarter stemmed in part from the outperformance generated in the business "that matters most to our core thesis -- the entertainment business  -- through higher licensing and subscription fees," says Bank.

The company's investment in content continues to "pay off in spades," he notes. "CBS is arguably the industry leader in content monetization across prime-time, cable/broadcast syndication, international syndication, and digital," says the analyst. As a result, CBS is the closest thing to a "large-cap, pure-play content story in an environment of increasing content value," add Banks.

He believes the stock, currently trading at $53 a share, remains undervalued, so he has raised his price target by $9 a share to $60, based on 15 times his pro-forma 2014 earnings forecast of $3.97 a share (excluding the outdoor business) on revenues of $15.65 billion. This is up from an estimated 2013 earnings of $3.08 a share on $15.2 billion. In 2012, CBS earned $2.52 a share on $14.08 billion.

According to CBS' Street watchers, the outlook for the second half of the year is very positive. In particular, the "third quarter is looking strong," says James Dix, analyst at Wedbush Securities, who rates the stock as "outperform."

His optimism is based in part on the potential for higher valuation on CBS' Outdoor America unit once it converts to a REIT in connection with the planned initial public offering in the first quarter of 2014. And for the long-term, worldwide demand trends are highly favorable for CBS' television content, says Dix.

Increasingly, part of the transparent growth in fee-based revenue for CBS's content comes from the U.S. in the form of higher retransmission and reverse compensation revenue for its CBS TV network and stations and content licensing with subscription platforms, notes the analyst.

The growth momentum has continued through the unexpectedly strong 2013 first-half results. CBS remains well positioned, says analyst Tuna Amobi of S&P Capital IQ, to benefit from the gradual economic rebound while increasingly cultivating non-traditional and other revenue streams.

As part of the split-off of its outdoor billboard business, CBS will also gain from a pending sale of its international outdoor assets in Europe and Asia, "with the proceeds likely to buoy share repurchases," says Amobi.

The analyst rates CBS stock as a "strong buy," with a 12-month price target of $62 a share.


Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

Tags: CBS


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