As we expected, CBS (NYSE:CBS) reported slightly better growth in its fourth quarter compared to what the company saw in Q3. While political ad spending, the Superbowl and ad pricing growth substantially lifted the results for CBS-owned TV stations and CBS Radio, cable networks benefited from continued subscriber growth and higher subscription pricing. There weren’t any notable updates on CBS’ plans to convert its outdoor business in the U.S. into a real estate investment trust (REIT). This development is important for investors as REITs get special tax considerations and often provide high payouts. As the company heads into 2013, it remains committed to its goal of improving or sustaining margins as well as reducing its dependence on advertisements and having good content is at the core of this strategy.
Ad Revenues Saw Moderate Growth
CBS’ overall ad revenues grew 3%, primarily due to growth in local broadcasting (CBS-owned TV stations and CBS Radio) and CBS Network’s ad revenues.  Higher ad pricing was one of the factors driving this improvement. For the new TV season that began in September 2012, CBS gained $2.7 billion in ad commitments from advertisers, implying ad pricing growth of 10% compared to 2011.  Despite better performance from rival NBC, CBS still remained one of the top destination for its viewers. Another factor was political ad spending and the Superbowl that lifted the results for CBS-owned TV stations and CBS Radio.
These two businesses constitute the company’s local broadcasting segment which derives almost all of its revenues from advertisements. The revenues from this segment grew by 9%, which was unusually high given the trend in the past three quarters. We feel that long term growth will still be governed by the overall growth in the U.S. advertising market and may not be as high.
It matters to CBS where the overall advertising market is heading as almost 50% of its value is dependent upon that. Heading into 2013, the company feels confident about the advertising environment and is still leading in terms of ad pricing and volume.
Even though ad sales remain important, the strategy is to reduce this dependence by growing cable networks revenue, retransmission fees and reverse compensation. Such growth will drive CBS towards higher margins. Although margins have been improving for the past couple of years, there could still be room for further growth as this business mix shifts.
Our price estimate for CBS stands at $44.80, implying a premium of about 5% to the market price.Notes:
- CBS’ Q4 2012 SEC Filings [↩]
- CBS Is Said to Attract $2.7 Billion in Upfront Ad Sales, Bloomberg, June 13 2012 [↩]