Inside Wall Street: CBS storms back into prime time

The No. 1 broadcasting network in the US is seen as big turbo-charged winner.

By Gene Marcial May 8, 2012 9:20AM

Media and entertainment giant CBS (CBS) isn't the new whiz kid on the block, but Wall Street raves about it as if it is. A number of near-term catalysts and long-term positives are driving the highly bullish appraisal of the entertainment company.

 

"CBS's dominance of TV, both on the core broadcast network and at Showtime, can be characterized as juggernaut," says analyst Laura Martin of investment firm Needham, especially as local advertising revenues for TV, radio and outdoor advertising have been "growing faster than national advertising, especially auto and retail."

 

The former unit of global entertainment content company Viacom (VIA) has diverse ownership interests in broadcast and cable TV networks, TV and radio stations, and book publishing. Its crown jewel is the CBS television network, along with the premium cable network Showtime, which has about 21 million subscribers.


The company's strong performance last year "capped another year of continued rebound in underlying business fundamentals, positioning CBS for further benefits from a U.S. economic rebound," says Tuna N. Amobi, analyst at S&P Capital IQ, who rates CBS as a "strong buy." 

  

And looking forward, things can only get better, analysts argue, as a number of positive fundamentals are going in CBS's favor. Among them is the fact that 2012 is a presidential election year, definitely a huge spending ad-year -- before and after the November polls.


In 2010, political spending during the mid-term elections came in at $4.2 billion. But this year, estimates are as high as $8 billion for political advertising. The bulk of the spending are for political ads on local television stations, which mostly is a boon to the TV station groups.

 

"The largest owner of television stations in the U.S. is CBS, with stations covering 40% of U.S. households," notes Needham's Martin. Political advertising has indirect benefits for CBS, she adds. For example, political advertising often "crowds out" corporate or business advertising before the elections. As a result, it creates pent-up demand for advertising by U.S. companies and businesses after the elections are over, especially during the Christmas season, Martin says.

 

At the same time, advertising rates shoot up during election years, and that bodes well for CBS. With about 70% of its revenues driven by advertising, CBS has a "concentrated exposure" to advertising -- local ads in particular, says the Needham analyst.


Owing to its strong operating leverage, CBS's earnings before interest, taxes, depreciation and amortization (EBITDA) and per-share earnings, says Martin, typically rise much faster than its revenue growth. As CBS has cut back costs, margins have expanded, notes Martin, who believes improvement in profit margins will continue throughout 2012.

 

Little wonder that shares of CBS have been on a tear, shooting up to a 52-week high of $34.33 a share on Apr. 27, 2012, up from a 52-week low of $18.95 reached on Oct. 3, 2011. The stock closed on May 7, 2012, at $32. Some pros figure CBS is worth $40 to $47 a share.  

 

Part of the stock's strong performance reflects investor anticipation of a strong rebound in ad spending. Indeed, CBS is "well-positioned to benefit from a U.S. advertising recovery, evolving over-the-top video market, and growth in retransmission revenue and international syndication," says Brett Harris, analyst at Gabelli & Co., who rates CBS a "buy." He figures that CBS's private market value is $47 a share.

 

Also a big part of the stock's rise is due to the improving ratings of the network's programs and shows. "CBS's prime-time lineup is very strong," notes Martin, topped by three different CSI series, The Mentalist, The Good Wife, several solid comedy shows, and Survivor.


The broadcast network cycle, says Martin, is measured in decades, with the network that is on top staying up there for a long time. Many of CBS's most popular shows are not old, with several of them less than three-years old, which implies another decade of relevance, says Martin.

 

And in the lucrative syndications business, CBS is also on top. It is the largest producer of prime-time and syndicated broadcast content in the world, says Martin, producing more than half of the top 10 syndicated shows on TV, including Wheel of Fortune, Jeopardy and Entertainment Tonight.


There is also the recovery in the radio broadcasting business, where CBS Radio is the second largest radio operator in terms of revenue in the U.S.

 

"We think the core advertising base and solid syndication pipeline should further feed off the network's continued strong performance," says S&P's Amobi. Based on CBS's strong 2012 first quarter results, he has raised his 2012 and 2013 earnings estimates, and also boosted his 12-month price target for the stock.

 

For 2012, Amobi expects CBS will earn $2.58 a share, up from 2011's $1.90. For 2013, the analyst forecasts earnings of $2.92. His new price target is $40, up from his previous goal of $35.

 

Veteran media analyst Edward J. Atorino of investment firm Benchmark, who is also a big bull on CBS, says that even excluding the impact of the presidential elections this year, 2012 is "shaping up to be a very good year for CBS's television group, driven by strong network ratings, growing syndication opportunities and retransmission revenues." Further anticipated recoveries in radio and outdoor advertising sales enhance CBS's positive outlook, he adds.


Atorino believes shares of CBS are undervalued, "given CBS's strong ratings, prime-time slate, superior growth and clean balance sheet." His 12-month target for the stock is $39 a share.

 

Atorino emphasizes that 2012 has "the potential to be a record year for CBS," as it benefits from new higher-margin revenue streams, including digital distribution and international syndication, while TV station revenue could show at least low-teens growth due to what is shaping up to be a hotly contested election year.

 

Atorino says CBS remains the only network to see year-on-year gains in all three key measures: ratings, households and demographics. With CBS's success in prime time and signs of recovery in TV advertising demand, Atorino says, CBS is set to perform well again this year.



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: cbsVIA
3Comments
May 8, 2012 12:41PM
avatar

Maybe CBS News will even get back to reporting real news. Right now the CBS Evening News is just a corporate owner propoganda channel. We hear about Travon Martin, The Secret Service non-event. Maybe they can change course and report on how Congress and the Big business and wealthy elite are looting our country!!! Maybe they can report on what is actually going on in Europe!! Since Europe is the practice field on how our Criminal Congress that are owned by the Elite Millionaires and Billionaires will use the European strategy to finish bankrupting our our country?!

 

Nah... The Super Pacs will make CBS approximately $180 million in profits from their sleaze ball ads on dividing the country. CBS will now upset their "handlers / owners.. The Big Money Boys!!

May 8, 2012 12:52PM
avatar
From a business model standpoint, this would be a tremendous opportunity to try to get CBS News back into the revenue generating role it used to have.  Perhaps if they tried to focus on news instead of entertaining news they would have a chance.   What if, for example, they positioned themselves actually in the middle of the political spectrum instead of being way left or right?  They'd be alone in the industry and they'd be able to capture a market that presently is unserved.  Leave the mainstream media on the left and forge your own place-you do that and you'll dominate news for the next 25 years!
May 8, 2012 12:13PM
avatar
Myself I do CBS radio... Lavar Arrington and Chad Dukes rule!
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