CBS (NYSE:CBS) is a diversified media company and owns several businesses including cable networks, broadcasting network, local TV stations, radio, outdoor advertising and publishing. With close to $15 billion in annual revenues and $4 billion in EBITDA (earnings before interest, taxes, depreciation and amortization), the company commands a market valuation of close to $24 billion. This is fairly close to our estimated valuation of $24.6 billion.
CBS has done well over the past two years. The company has grown its EBITDA margins substantially, from close to 19% in 2009 to an estimated 27% in 2012. During the same period, its stock price increased by almost 500%. Let’s take a look at different key businesses of CBS and how they are driving its value.
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Cable Networks ~ 25% Of CBS’ Value
With close to $1.75 billion in revenues and $840 million in EBITDA, CBS operates a successful cable networks business. It owns Showtime Networks, CBS Sports Network, and Smithsonian Networks. Showtime Networks consists of premium TV channels such as Showtime, Flix and The Movie Channel. These premium TV channels offer a variety of programming to cable and satellite subscribers in the U.S. who pay additional monthly premium for access. Showtime Networks tries to bring to its audience new dramas and exclusive content which differentiates the channel from its competitors. In addition, CBS Sports Network offers programming based on college sports, especially athletics. CBS’s cable networks make money by charging pay-TV service providers a carriage fee on a per subscriber basis and licensing of Showtime’s original content.
Showtime, Flix and The Movie Channel have increased their combined subscriber base from 55 million in 2007 to 73 million in 2011.  Given their premium nature, this roughly 30% growth is commendable. However, during the same period, revenues increased from about $1.16 billion to $1.62 billion, implying growth of 40%.  This indicates growth in subscription pricing, content licensing as well as contribution from other networks mentioned above. Going forward, we expect this growth to continue as cable networks have shown strong demand and market for licensing continues to grow driven by international expansion and proliferation of online streaming platforms.
CBS Owned TV Stations And CBS Radio ~ 20% Of Value
This business essentially generates roughly $2.7 billion in revenues and close to $950 million in EBITDA. Even though the revenue and EBITDA contribution is relatively higher, the value contribution is lower as we believe this business will not experience the same growth as the cable networks.
CBS owned TV stations essentially comprise about 29 broadcast TV stations owned by the company through CBS Television Stations Group. These stations produce news and broadcast public affairs, sports and other programming to serve their local markets and offer CBS, The CW and MyNetworkTV programming and syndicated programming. These stations earn revenue via selling advertisement slots to advertisers. Additionally, CBS Radio operates about 130 radio stations across the United States and offers audiences several formats through the combination of on-air, online and new media platforms. It broadcasts its programs (mostly) for free and charges advertisers to advertise between these programs. Most of the advertisements on radio are local in nature.
The company’s revenue growth has been stable for the past few years while the EBITDA margin has improved. We feel there are no major catalysts that can drive substantial growth in this business and therefore expect moderate growth. This growth will be driven by the general improvement in the U.S. advertising market and CBS Radio’s focus on major markets. Total ad spending in the U.S. in the first three quarters of 2012 grew by 2.5% over the same period in 2011. 
If we look at Q3 alone, this growth amounted to 7% indicating that the ad market is picking up.  This will help CBS’ TV stations and radio business as both depend almost solely on advertising. In addition, CBS Radio has divested radio stations in the small and medium markets and consolidated its position, which has resulted in a loss of market share. However, CBS’s strategy of focusing on larger markets is paying off as audience share has grown at a fast pace in top 10 markets. This is likely to drive future revenue growth.
Broadcasting Business ~ 20% Of Value
CBS Television Network is one of the biggest broadcasting networks in the U.S. and offers a wide variety of programs and reaches out to a large audience. CBS programming includes news shows such as 60 Minutes, 48 Hours Mystery as well as primetime comedy, drama and reality shows. In addition, CW’s programming includes shows such as Gossip Girl, The Vampire Diaries and America’s Next Top Model. Both these networks make money via advertising. The advertising rates vary significantly based on day, time of the day, target audience for the show and prevailing demand for TV advertising.
With close to $4.5 billion in revenues and close to $1 billion in EBITDA, CBS’ broadcasting business (which includes CBS Network & CW Network) seems the biggest. However, unlike cable networks, the growth trajectory of this business is likely to slow due to rising competition from cable networks and alternative platforms. This has affected both daytime and primetime viewership, and despite healthy growth in ad pricing, revenue growth is likely to remain low.
CBS TV Licensing & Other ~ 20% Of Revenues
With close to $3.3 billion in revenues and $700 million in EBITDA, CBS’ licensing and production business is certainly meaningful. This business includes revenues earned by CBS primarily from production and distribution of TV programming and films. The business units involved include CBS Television Studios, CBS Studios International, CBS Television Distribution, CBS Films and CBS Interactive. We expect healthy revenue and profit growth for this business in the future. In our opinion, the license fee negotiations are based on incurred costs and the payback period. As the production costs are increasing, CBS is bound to increase the licensing fee.
In addition to the above, the expansion in subscription base of streaming companies such as Netflix, Blockbuster, Amazon, and Hulu has opened up a lucrative option for CBS and other media companies. These streaming companies have deeper pockets now and are able to pay handsomely for content licensing. This trend will benefit CBS which has been smart about producing appealing content, thus maintaining relatively higher ratings than its competitors.
Our price estimate for CBS stands at $38.70, implying a premium of less than 5% to the market price.Notes: