How Political Advertising Impacts CBS’s $33.50 Value

This year, we expect to see a significant increase in political ad spending in the U.S. compared to 2010, due to the upcoming presidential elections. As a result, CBS (NYSE:CBS) expects a boost to its profits. How significant could this boost be? What is the importance of presidential elections to CBS? Below we try to answer these questions briefly. CBS in addition to other media companies such as News Corp (NASDAQ:NWS), Disney (NYSE:DIS) and Time Warner (NYSE:TWX) will look to gain from political advertising this year.

See our complete analysis for CBS

CBS’ Expectations

CBS expects that about $2 billion will be spent in political advertising in 2012. ^[1] The company further states that it expects to  gain about 9% to 10% share of this political ad spending. This translates into $180 million to $200 million in revenues.

Significance Of Political Ad Spending

We estimate that CBS’ advertisement dependent businesses constitute about 55% to its value and roughly 65% to its revenues. The lower value contribution can be attributed to lower margins relative to other businesses. These include CBS network, CW network, local TV stations, CBS radio, CBS interactive and outdoor advertising.  If we look at political advertising related revenues, especially during presidential elections, we find that they constitute roughly 2% of CBS’ total advertising revenues. Therefore, the significance is not much.

However, if we assume that these ad revenues are incremental to profits with minimal additional costs for CBS, it could translate to around 5% additional value to our price estimate.

How Political Advertising May Trend

About $2.2 billion political ad dollars were spent on TV medium alone in 2008. ^[2] This figure seems to have come down for year 2012 where not just TV, but overall political ad spending is predicted to be around $2 billion. Perhaps digital advertising is taking some share from Television, although TV continues to remain the dominant medium. As the advertisement shift continues, CBS will have less dollars to share from. Nevertheless given the limited significance of political ad spending and expectation that Television will still be the most effective medium for sometime to come, CBS shouldn’t worry too much.

Our price estimate for CBS stands at $33.52, which is inline with the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. CBS sees strong 2012 on political ads, cable fees, Reuters, Feb 15 2012 [↩]
2. 2008 Political Ads Worth $2.5 Billion to $2.7 Billion, broadcastingcable.com, Dec 2 2008 [↩]