Analysts' Choice: CBS Changes Its Channels

8/14/2017


  Recent Price
$65
  Dividend
$0.72
  Yield
1.1%
  P/E Ratio
15
  Shares (millions)
410
  Long-Term Debt as % of Capital
76%
  52-Week Price Range
$70.10 - $48.88

In the years ahead, we can expect the lineup at CBS ($65; CBS) to keep changing. The media giant isn't turning its back on the old advertising-driven business model. But in recent quarters the company has emphasized newer media, which allow for higher growth and fatter profit margins.

CBS started by taking a proactive approach to the rise of electronic media, launching an array of its own online services and creating a broad platform for the delivery of over-the-top services offered by other companies. While the creativity of the new breed of media companies may be boundless, their ability to market and deliver their content is not. That's where CBS and its broad reach come in.

A pending split-off of CBS Radio, which accounted for 9% of 2016 sales, reflects the parent company's decision to sharpen its focus on content as the broadcasting market becomes more fragmented. CBS sees new content, much of it designed for nontraditional distribution channels, as the key to maintaining its status as the No. 1 TV network in the U.S.

We rate CBS a Focus List Buy and a Long-Term Buy.

A new program

CBS' electronic offerings rely on subscriptions to generate revenue, a relatively new phenomena for the broadcasting industry. However, the subscription model has worked fine for pay-TV providers and should prove less economically sensitive than advertising.

In the second half, CBS should start collecting licensing fees from its multichannel distribution services, a high-margin revenue stream. CBS All Access should also start cashing in on its recent subscription growth and will expand overseas next year. The All Access service airs live CBS content as well as movies, serialized episodes of popular comedy and drama series, and even NFL football games.

The consensus projects 11% growth in per-share profits in the second half of 2017, above the 8% CBS managed in the first half.

In the June quarter, CBS earned $1.04 per share, up 12% on 9% sales growth. Both sales and profits exceeded the consensus. Revenue from affiliate and subscription fees rose 16%, including the contribution from digital services. Revenue from content licensing and distribution increased 12%, powered by both U.S. and overseas demand for CBS' broad library of content. Ads now account for 40% of company revenue, down from 70% a decade ago.

Looking ahead

While CBS will continue its expansion in digital media, the advertising business remains a solid source of cash and still has some growth potential. Strong up-front ad sales this year bode well for ad demand in the year ahead.

In February, Entercom Communications ($10; ETM) agreed to merge with CBS Radio in a deal slated to close in the second half of this year. CBS shareholders will have the option to convert their shares into CBS Radio shares, which in turn will be exchanged for Entercom stock. We recommend sticking with CBS shares rather than taking the Entercom.

You can obtain an annual report for CBS Corp. at 51 W. 52nd St., New York, NY 10019, (212) 975-4321, www.cbscorporation.com.

CBS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '17
1.04
vs.
0.93
9%
70.10
-
59.72
17 - 14
Mar '17
1.06
vs.
1.02
-7%
69.60
-
61.95
17 - 15
Dec '16
1.11
vs.
0.92
-10%
65.09
-
54.35
17 - 14
Sep '16
1.05
vs.
0.88
-15%
58.22
-
48.88
16 - 13
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
13.17
4.11
0.63
65.09
-
41.36
16 - 10
2015
13.89
3.31
0.60
63.95
-
38.51
19 - 12
2014
13.81
2.96
0.51
68.10
-
48.83
23 - 16
2013
15.28
2.80
0.48
64.06
-
37.43
23 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
66
23
72
87
54
36
53

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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