The success story for CBS’ (NYSE:CBS) stock is hinged on how the company has focused on developing and maintaining quality content and, more importantly, how it has turned around its margins. To gauge the magnitude of the latter, one can see that CBS’ cable networks division margin has increased from 29% to 44% over the course of past four years. If the company was unable to see this increase, its worth would have been 10% less than what we currently estimate. We are also witnessing a rebound in its margins for other businesses with the highest potential for improvement in ‘Outdoor Advertising‘ and ‘CBS owned TV Stations & CBS Radio‘ business segments. Below we take a brief look at value growth potential from margin improvements in these businesses. CBS competes with other media companies such as Time Warner (NYSE:TWX), Disney (NYSE:DIS), Viacom (NASDAQ:VIA) and News Corp (NASDAQ:NWS).
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The EBITDA margin for ‘CBS owned TV Stations & CBS Radio’ business has dropped from 36% to 29% over the course of past four years. We currently forecast a conservative flat margin growth. However, if CBS can attain its 2007 levels of 36% by the end of our forecast period, there can be an upside of just under 10% to our current price estimate.
Furthermore, we observe that the EBITDA margin for Outdoor Advertising business has declined from about 28% in 2007 to just 16% in 2011. We currently forecast a mild gain as we are skeptical about the ability of this traditional business to compete with relatively newer forms of advertisements. However, if CBS can attain the 2007 margin levels of 28% by the end of our forecast period, there can be an additional upside of 5-10% to our price estimate.
To sum up, if you expect CBS’ prime ad supported businesses be as profitable as they were in 2007, or perhaps more, then the company’s stock is worth at least 15-20% more than what we currently estimate.
Our current price estimate for CBS stands at $33.52, implying a premium of little over 5% to the market price.
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