Digital Publishing Is Small Potatoes For CBS But Holds Promise

CBS (NYSE:CBS) reported another impressive quarter marked by continued revenue growth and margin improvement. A small but notable aspect was the digital publishing (e-books) business which is growing at a rapid pace. In publishing, CBS competes with media giants such as Time Warner (NYSE:TWX) and Disney (NYSE:DIS). Although the growth is stellar, publishing is still a very small division for CBS, constituting less than 5% to its value, as per our estimates. Nevertheless, however little it may be, there is still opportunity to recoup lost sales from a broader trend of print publishing decline and leverage growth of e-readers and tablets.

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The company’s revenues from e-books grew by 64% in Q1 2012 compared to same quarter last year, and now constitutes about 26% of the total publishing revenues. ^[1] This proportion is significant given that the popularity of e-books started rising only in recent years.

The rapid growth in smartphones, e-readers and tablets, especially Apple’s (NASDAQ:AAPL) iPad, has resulted in increased e-book demand. Unfortunately, CBS lacks unique characters that Disney has, and therefore its ability to leverage its own content via publishing is limited. Nevertheless, it makes sense for the company to invest in this business. This is a growing segment and thus the opportunity to gain market share is more if the company can offer lucrative royalties to authors and come up with innovative e-book designs.

Our price estimate for CBS stands at $33.52, implying a slight discount to the current market price. We are reviewing our estimates in light of recent earnings.

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1. CBS’ Q1 2012 earnings transcript [↩]