Inside Wall Street: CBS gets raves from investors

The network's stock continues to hit new highs.

By Gene Marcial Sep 21, 2012 2:13PM

Couple on sofa watching television together, copyright Blend Images, Hill Street Studios, the Agency Collection, Getty Images

In case you haven't noticed, advertising has recovered with the improving economy, invigorating the results of television networks and cable TV companies. 

Of course, the Olympics were a big help, and the coming presidential election is generating ad spending by both of the major political parties.
 
Little wonder that CBS -- which owns 30 television stations, 130 radio stations, and the third-largest outdoor international advertising operations -- is getting top ratings on Wall Street. 

CBS is reaping the benefits from the pickup in the economy and other positive factors that have produced impressive gains for the No. 1 U.S. broadcast network.
 
"CBS is well positioned to benefit from a U.S. advertising recovery, the evolving over-the-top video market, and growth in retransmission revenue and international syndication," says Brett Harriss, a research analyst at investment firm Gabelli & Co. The momentum, he says, should carry through 2013.
 
He rates CBS as a "buy" and calculates the intrinsic private-market value of the stock by 2013 at $48 a share. It closed at $37.13 on Sept. 20, a 52-week high, exceeding the previous high of $36.55.
 
This year, Harriss figures CBS will generate $15.04 billion in revenue; $3.57 billion earnings before interest, taxes, depreciation and amortization (EBITDA); and profits of $2.60 a share. In 2011, CBS produced revenue of $14.24 billion, EBITDA of $3.12 billion, and earnings of $1.90 a share.
 
Harriss expects CBS to monetize its impressive earnings momentum in the 2012-13 season, with local assets and operations benefiting from the presidential election.
 
"We estimate share repurchases, financial gearing and decreasing D&A will leverage 7% of EBITDA growth into 16% earnings-per-share growth through 2016," he says.
 
Analyst Simon R. Shoucair of investment research firm Value Line says CBS has won investor favor because of solid earnings gains and expectations that its stock will perform well. "CBS is poised to deliver strong share-net gain this year," he says, because recent strategies have continued to bear fruit.
 
"Revenues and profits have risen, thanks to efforts to bolster its top-rated prime-time programming lineup," Shoucair says. That has helped offset previous declines in broadcast network viewership. As overall advertising revenue has risen, the company's efforts to open up new revenue streams have proved successful, he adds, particularly in nonadvertising categories.
 
Enhancing the company's top and bottom lines are robust content licensing and distribution revenues, thanks to digital streaming agreements and syndication sales. "We look for higher affiliated and subscription fees to help drive the cable unit's results," says the Value Line analyst, who notes that those factors, along with cost controls, "ought to widen margins."
 
Shoucair says recent program launches should deliver higher ratings, as CBS remains a high-ranked option, especially in total viewership -- particularly in the 18-to-49-year-old demographic.
 
He notes that CBS carries six of the 10 most popular shows, including seasoned productions such as "NCIS" and newer ones such as the revised "Two and a Half Men," which are boosting viewership.
 
Under the leadership of president and CEO Leslie Moonves, CBS is boosting "the proportion of recurring, nonadvertising revenue in line with the ongoing shift in ad dollars to cable and the Internet," Shoucair says. As a result, CBS' stock is among the highest in "timeliness" in Value Line's stock ranking system.     
 
Laura Martin, an analyst at investment firm Needham, is impressed with CBS' return of capital to shareholders -- mainly through share buybacks and rising dividends -- a major factor in a media stock's valuation. That's part of the reason she rates CBS as a buy, as she expects the company's return on invested capital (ROIC) will increase to 9.5% in 2012, from 7.5% on 2011. 

"This is one of the largest increases in ROIC in our coverage universe," says Martin, who figures CBS will earn $2.81 a share in 2013 on revenue of 16.11 billion, up from her 2012 estimate of $2.55 a share on $15.07 billion. In sum, the broadcast network remains a premier investment choice in this highly competitive field of entertainment. 


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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.

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