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Investment Overview for CBS (NYSE:CBS)
Below are key drivers of CBS' value that present opportunities for upside or downside to the current Trefis price estimate for CBS:
Cable Networks Subscription Growth
- Cable Networks Revenue: CBS' cable networks, which includes Showtime Networks, has been able to grow its subscriber base even in the recent years despite the growth of digital video platforms. It should be noted that many cable networks have seen subscriber declines as more people embrace newer digital technologies, which costs a fraction of monthly pay-TV bill and thereby increase the cord-cutting phenomenon. The reason for subscriber growth at Showtime has been the quality of content and its demand. Showtime is home to some of the popular TV shows, including Homeland, Ray Donovan and The Affair among others. Showtime Networks penetration among the U.S. pay-TV households currently stands around 69% and there is still room for growth. It should be noted that the figure is much higher for some other networks, such as FX with 90% penetration levels. If Showtime Networks manages to reach 85% penetration levels in the coming years, along with 5 million streaming subscribers, it will result in additional revenues of over $1 billion for cable networks by 2022, representing an upside of 10% to CBS' price estimate. However, if the cord-cutting phenomenon intensifies, it may result in lower subscriber base even for CBS. However, even in that case streaming subscribers should continue to grow as viewers shift to digital platforms. There is no potential downside for streaming services as there is limited cost being incurred on technology and the programming offered on the service is Showtime's in house programming. Streaming growth can help offset some of the revenue decline on pay-TV front and this may result in revenue loss of over $700 million by 2022, resulting in over 5% downside to our current price estimate.
- Broadcasting Advertising Revenues : CBS & CW Network Ad Revenue represents ad revenues earned by CBS Television Network and CW Network. These broadcasting networks heavily rely on advertising. Currently we forecast the advertising revenues to increase from around $4.4 billion in 2015 to $5.9 billion by the end of our forecast period. There could be a 10% downside to our price estimate if this figure remains subdued under $4 billion. This could happen if the network is unable to secure/renew future sports programming rights and its non-sports programming doesn't pick up. Also, growth of digital platforms has led to lower viewership on television. On the other hand there could be around 10% upside to our price estimate if the network revenues blows past expectations north of $8 billion by the end of our forecast period. This is possible due to a better ad marketplace driven by the growth in the economy and CBS' appealing content and its sports coverage.
For additional details, select a driver above or select a division from the interactive Trefis split for CBS at the top of the page.
CBS makes money primarily through advertising on CBS Television Network, licensing of TV shows, fees charged to cable and satellite operators for carrying premium channels such as Showtime, and advertising revenues earned by its owned TV stations, radio business and billboards.
Cable Networks are most valuable for CBS primarily due to their consistent revenue growth rate and high margins.
Cable Networks revenues stood at around $2.2 billion in 2015 and the growth rate has averaged at around 9% for the past few years. Even though revenue figure is quite low compared to that for its other businesses such as CBS Network, Local Broadcasting etc., the expected growth is attractive. Given the demand for premium content, stability of subscription business, newly launched streaming service and annual fee increases, we expect these revenues to grow to $3.3 billion by the end of our forecast period.
Furthermore, this business has high EBITDA margins of around 45% compared to 35% for local broadcasting and just 19% for CBS Television Network.
Increasing pay-TV competition
Increasing competition among pay-TV providers such as Comcast, Time Warner, DirecTV, AT&T and Verizon is favorable for media companies. In such a scenario, CBS can gain negotiating power in discussions regarding the pricing of subscription fees for its programming content.
Increasing disputes with pay-TV service providers
Even though competition among pay-TV companies is increasing, they cannot continue bidding up subscription prices for channels. In order to protect consumers, pay-TV providers are increasingly taking a stand against media companies, leading to frequent channel blackouts.
Online licensing & broadcast advertising
With growth of online streaming companies such as Netflix that monetize primarily older content, licensing opportunities have expanded for media companies. However, given a decline in traditional television viewership, ratings are hit hard and this has resulted in lower advertising revenues for most of the media companies. So far, licensing revenue growth has not been able to completely offset the declines seen on advertising front. Having said that, broadcasting networks, such as FOX, CBS, NBC and ABC have been able to contain the advertising decline due to their exposure to sports programming, which garners very high viewership and better ad pricing.
There is a massive demand for streaming services and for certain premium networks such as Showtime and HBO, it makes sense to go over-the-top and tap the 70 million homes, which haven't subscribed to these networks. Accordingly, CBS launched All Access for CBS programming and Showtime Anytime for Showtime's programming that is now being offered as a standalone streaming service. In early months, these services are seeing good traction and are likely to drive future profits for the company.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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