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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:
Showtime Streaming Subscriber Growth: Showtime offers a standalone streaming service, primarily targeting broadband-only homes and others who haven’t subscribed to the network. There are more than 10 million broadband-only homes, and 90 million homes in the U.S. that do not subscribe to Showtime. Given the rise of alternative video platforms, it becomes important for certain standout and premium networks such as HBO and Showtime to make their programming available on different platforms. For instance, a broadband-only subscriber likes to watch movies or Homeland TV series and he or she can opt for Showtime’s streaming service without a pay-TV connection at a less than one-fifth cost.
While there is appears to be a massive growth opportunity for Showtime in the streaming arena, we take a conservative view in our pricing model, owing to expected increase in competition in the media industry. Accordingly, we currently assume 3.5 million subscribers by the end of our forecast period. Nevertheless, given the demand for Showtime’s content, a standalone service may look attractive to many customers. If the network does manage to gain an overall streaming subscriber base of 7.5 million at $11 price tag, it would translate into revenues of around $1.30 billion annually. This would add around 10% to the company’s stock value. There is no potential downside for this scenario as there is limited cost being incurred on technology and the programming offered on the service is Showtime's in house programming. However, potential upside to the stock can vary depending on the subscriber trends.
CBS & CW Network Ad Revenue: 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 $4.45 billion in 2014 to $5.7 billion by the end of our forecast period. There could be more than 10% downside to our price estimate if this figure remains subdued under $4 billion. This could happen if the cable networks grow at a much faster pace. Over the course of the past few years, the cable networks have risen in popularity owing to their specific focus. This has helped them create loyal audience base and consequently broadcast networks have suffered in terms of viewership. 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.
CBS Cable Networks Subscription & Licensing Revenue: Currently we forecast this figure to rise from about $2.18 billion in 2014 to close to $4 billion by the end of our forecast period. However there could be a downside of about 10% to the our price estimate if the figure remains rangebound around $3 billion due to high competition from other networks such as HBO and also due to rise of alternative video platforms such as Netflix. On the other hand, there could be upside of about 10% if this figure was to increase to $6 billion instead driven by growth in subscription fees.
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 $2.18 billion in 2014 and the growth rate has averaged at around 10% 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 and annual fee increases, we expect these revenues to grow to $3.4 billion by the end of our forecast period.
Furthermore, this business has high EBITDA margins of around 48% compared to 38% for local broadcasting and just 20% 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.
With growth of online streaming companies such as Netflix that monetize primarily older content, licensing opportunities have expanded for media companies. This is helping them recoup some of the lost revenues from declining DVD sales. 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.
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 90 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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