CBS (NYSE:CBS) will release its Q3 2012 earnings on November 7, and we expect moderate to healthy growth driven by affiliate fee growth, quality content, a general improvement in advertising market and growth in international syndication. In addition, retransmission fee growth and digital licensing deals will add to profits. We expect another good quarter for CBS although margin growth may slow down a bit given how much it has rebounded in the last couple of years. We believe that CBS’ long-term outlook remains solid and our current price estimate for CBS stands at $38.75, implying a premium of about 20%.
Growth In Ad Market And CBS’ Quality Content Will Aid Ad Revenues
We estimate that approximately 55% of CBS’ value comes from advertising-related businesses and this makes the company vulnerable to the overall economic environment. However, thanks to a revival in the U.S. automotive market and political ad spending, TV advertising spend in the U.S. has witnessed moderate growth in 2012. This growth has stayed above overall advertising market growth despite a slight decline in TV viewership, indicating the strengthening of ad pricing. 
For the new TV season that began in September 2012, CBS grabbed $2.7 billion in ad commitments from advertisers, implying ad pricing growth of 10% compared to 2011.  This growth is slightly higher than what its competitor News Corp (NASDAQ:NWS) was able to secure. This can be attributed to CBS’ quality content and good ratings in the past few quarters. However, as far as Q2 is concerned, we wouldn’t say that CBS’s performance was spectacular. It was affected by the broadcast of the Summer Olympics in August, and NBC’s fantastic start to the new TV season in September. While we maintain that CBS has done well with its programming, some of the ad dollars in Q3 would have been diverted towards NBC, thus slowing down its ad revenue growth.
International Market Syndication & Digital Licensing Will Help
The advantage of producing a good quality show is that it can be monetized in several ways and for several years. After the first run in the U.S., CBS can monetize its shows by international syndication, licensing for re-runs in the U.S., and licensing to online streaming platforms such as Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN). We expect these avenues to support CBS’ third quarter revenue and margin growth.
Even though Europe remains weak, CBS has stated that the weakness in the economy hasn’t affected the purchasing power of media companies there.  The syndication of programming remains strong even though ad-related dollars have been affected.
Apart from Europe, CBS has been expanding in emerging markets as well and overall international growth has been impressive. Apart from this, CBS continued to sign new deals with Netflix such as the one to license its content in Canada and Latin America.  Syndication and digital licensing are directly additive to profits and given that CBS has a high operating leverage, more such deals will support its margin growth.Notes:
- Data Dive: US TV Ad Spend and Influence (Update), Marketingcharts.com, Sept 14 2012 [↩]
- CBS Is Said to Attract $2.7 Billion in Upfront Ad Sales, Bloomberg, June 13 2012 [↩]
- CBS Corp. CEO Upbeat on Fall TV Season, New DirecTV Retrans Deal, The Hollywood Reporter, Sept 20 2012 [↩]
- Netflix and CBS reach international deal, Reuters, July 27 2012 [↩]