While revenue growth was low in Q3 2012, CBS (NYSE:CBS) did demonstrate significant growth in its profits driven by cost controls and increasing contribution of high margin revenue streams such as digital licensing and re-transmission fee. It is a little surprising that CBS experienced low revenue growth despite having a good content, increasing retransmission and digital licensing deals. It appears that there have been certain offsetting factors. These include surprising decline in broadcasting ad revenues due to larger than expected impact of Olympics, decline in CBS’ radio revenues and sluggish growth in Outdoor business. Even though the company has been working on improving margins, it can not just ignore the fact that it needs to do something about its revenue growth as well in order to sustain long-term growth in profits.
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CBS Could Increase Growth In Future
We previously noted that CBS did not perform that well in Q3 due to the broadcast of the Summer Olympics on NBC in August, and NBC’s fantastic start to the new TV season in September. However the impact was a little deeper than we expected. Nevertheless, we believe that the next two quarters will show higher growth aided by political ad spending and some of the highly profitable prime time events taking place in Q1 of 2013 such as AFC Championship, The Super Bowl and The Grammy’s.
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.  Given that ad pricing has grown, all CBS needs to do is sustain or grow its ratings and it should witness healthy growth in broadcasting segment in the upcoming quarters. Additionally, the company has completed its retransmission deals with DirecTV (NASDAQ:DTV), Dish Network (NASDAQ:DISH), AT&T (NYSE:T) and Cablevision this year, and further expects to close 3 more such deals in 2013. While the absolute amount of retransmission fee still remains small, it is directly additive to profits. CBS expects to hit $1 billion in annual revenues from retransmission fee and reverse compensation from its affiliates by 2017. 
The Company Needs To Diversify
As far as the international markets are concerned, CBS is primarily making money via show syndication. However, its rivals such as News Corp (NASDAQ:NWS), Viacom (NASDAQ:VIA) and others have been expanding the direct reach of their own networks outside the U.S. The impact was visible in recent results when a substantial portion of News Corp’s affiliate fee growth came from the international markets. CBS could adopt this approach to fuel its revenue growth. In addition to this, the company could focus on sports programming which appears to be in strong demand, and one of the strong drivers of growth for News Corp and Disney (NYSE:DIS).
We are in process of updating our price estimate in light of recent earnings, and will have an update ready soon.
Our current price estimate for CBS stands at $38.75, implying a premium of about 20%.Notes:
- CBS Is Said to Attract $2.7 Billion in Upfront Ad Sales, Bloomberg, June 13 2012 [↩]
- CBS’ Q3 2012 Earnings Transcript [↩]