CBS (NYSE:CBS) is mainly into broadcasting, cable networks and the radio business. However, a small portion of its value can be attributed to outdoor advertising and publishing businesses. These two businesses together account for about 10% of the company’s value, which brings us to the question – should CBS be even focusing on these units?
As far as outdoor advertising is concerned, the company is converting this business in the U.S. into a real estate investment trust (REIT). REITs invest in real estate, get special tax considerations and offer high yield to investors. CBS’ proposed REIT is one of a kind, and the company will lease its outdoor assets such as billboards to advertising companies and earn rental income. With special tax considerations and attractive valuations that REITs are getting, CBS’ outdoor business could garner a substantial valuation upgrade.
This leaves us with the publishing unit, which is the least valuable business that CBS owns and contributes just about 2% of the company’s value as per our estimates. Should CBS discontinue this and divert the funds elsewhere?
Overview Of The Publishing Business
Simon & Schuster, CBS’ publishing division, publishes books in print, audio and digital formats and sells them to the readers. Book publishing is a mature and stable industry. As is the case with the movie industry, new titles constitute a major portion of publishing revenues for a particular year. Additionally, revenues are very hit-driven with top 10 titles accounting for a significant portion of its annual revenues.
CBS’ publishing revenues have remained more or less flat for the past few years, amounting to little under $800 million in 2012. Even though we expect revenues to grow from here due to growing sales of digital books, the business still holds a very small value for the company. Digital books are gaining popularity due to high demand for tablets and e-readers as well as the general shift of consumers to the Internet. On the other hand, print sales have declined over the past few years and this is not just true for books but also for newspapers and magazines. The availability of a variety of free content on the Internet also creates an incentive for readers to not buy books. Overall, the rebound in revenues is not going to be significant.
However – Limited Funds Usage, And Still Profitable
It appears that given the limited investment required for the publishing business, the anticipated improvement in revenue growth and that publishing is still profitable, CBS might not want to divest it. While publishing EBITDA margins stood at a little under 14% in 2012, capital expenditures amounted to just about 0.6% of the segment’s revenues. CBS wouldn’t be able to free meaningful amount of funds by divesting this business. We believe that the company will closely monitor the sales of digital books over the course of next few quarters and the decision to get rid of the publishing unit will more or less depend on whether digital sales can more than compensate for the decline in print sales.
Our price estimate for CBS stands at $47, implying a slight premium to the market price.