CBS (NASDAQ:CBS) has been a crown jewel of the media industry which boasts of big names such as Disney (NYSE:DIS), Time Warner (NYSE:TWX), News Corp (NASDAQ:NWS) and Viacom (NASDAQ:VIA). The company has provided very high returns to its stockholders via capital gains, resulting from its efforts to improve margins and consistently produce high quality content, thus boosting its results each quarter. Here we take a step back and look at key trends that driving CBS and and if these can continue to drive results in the future.
1) Improving Advertising Environment
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CBS currently depends heavily on advertisement. We estimate that CBS Network, CBS-owned TV stations, CBS Radio and outdoor advertising businesses together constitute close to 50% to the company’s value.
All of these business are almost solely dependent on advertising revenues and thus the margins can fluctuate significantly depending upon the strength of the economy. This year has seen a positive start in terms of automotive sales, thus indicating better demand from advertisers. The ad pricing growth has been solid as evident from recent earnings announcements from several media companies. And as the economy further improves, the ad spending is only going to rise, thus benefiting CBS. Furthermore, CBS will also benefit from significant political ad spending in 2012.
2) Content Licensing And Retransmission Fee Push
To reduce its reliance on advertising revenues, CBS has been pushing for re-transmission fee for its broadcast content and finding different ways to license its video content. The progress has been notable in this area and the company is already earning close to $200 million on annual basis in re-transmission fees.
Furthermore, its deals with streaming companies such has Netflix (NASDAQ:NFLX) have not only helped with the revenue growth, but also with margin enhancement as these are incremental high margin revenue opportunities. This trend is going to continue and help broadcasters such as CBS to mitigate revenue and margin fluctuations in weak economic environment by providing them a more stable revenue stream.
3) Growth In Digital Devices
The proliferation of digital devices including smartphones, tablets, digital TV and notebooks are making it easier and more enjoyable for an average viewer to watch the video content. This directly translates into high demand for quality content and opens up different ways of monetization. These include digital licensing fee from streaming companies, direct streaming via CBS’ site and monetizing it via subscription or ads, and the ability to charge more for the content from pay-TV companies by allowing them to give their subscribers access on multiple platforms.
4) Growth In Satellite & Internet Radio
These two companies have been gaining subscribers at a fast pace and given that they will get increasing share of listeners’ time, CBS might find itself in a little difficult position. The monetization of CBS radio is ad-based and listener count directly impacts it. We estimate that CBS radio constitutes more than 10% to CBS’ value.
Our price estimate for CBS stands at $34.74, implying a premium of about 10% to the market price.