We estimate that about 55% of CBS’ (NYSE:CBS) value can be attributed to its advertising-based businesses including its broadcasting networks (CBS & CW), local TV stations, CBS Radio and outdoor advertising service. Among these, the broadcasting business is one of the biggest, constituting roughly 25% of our price estimate for the stock.
CBS’ broadcasting revenues declined slightly in 2009 due to a weak economy that impacted overall ad spending in the U.S. However, its revenues jumped in 2010 with an improving economy before falling again in 2011 and 2012 due to weaker ratings. Going forward, we expect the figure to grow at a slow rate of 2-3% due to the mixed impact of improving ad pricing and expected pressure on viewership. It must be noted that broadcasting revenues considered here only include advertising related revenues and not the retransmission fee.
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. CW’s programming includes shows such as Gossip Girl, The Vampire Diaries and America’s Next Top Model.
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Support – Improving Ad Pricing
The overall U.S. advertising market is growing and advertisers, especially automotive companies, are willing to spend more. TV still remains the biggest medium for advertisements and therefore CBS will benefit from this broad level improvement. For the new TV season that began in September 2012, the broadcasting network gained $2.7 billion in ad commitments from advertisers, implying ad pricing growth of 10% compared to the previous year. 
Despite a better performance from rival NBC in the new TV season, CBS is still doing reasonably well backed by its quality programming and investment in original content. The average age of CBS Network’s audience is older than that for many other broadcast and cable networks. Despite focusing on an older audience, CBS makes money via focus on their affluence. Almost half of the network’s ad sales are targeted at 55+ demographic. 
Offset – Declining Viewership & Competition
The viewership for the U.S. broadcasting networks is declining and CBS is no different. This secular decline is being fueled by the popularity of cable programming and increased competition from alternative video platforms such as Netflix (NASDA:NFLX), Amazon (NASDAQ:AMZN) and others. Unlike broadcasting networks, a lot of cable networks focus on a particular genre, thus creating a loyal viewer base. We expect this trend to continue and act as a key offsetting factor for CBS’ broadcasting revenue growth.
The table below shows the viewership change for the biggest broadcasting networks in the U.S. for the current season. 
According to research firm Magna Global, the overall ad commitments for TV’s upfront market for the current year could increase by 2%.  While ad sales for the broadcasting networks will decline by 2%, cable networks will see 5% growth in their ad related revenues.  Another research indicates that the U.S. broadcast networks’ ratings have slumped by 50% since 2002.  The audience is increasingly getting fragmented and too many networks are competing for a share of the viewers’ time.
What Historical Growth Suggests
The company’s broadcasting revenues have fluctuated in the past with average annual growth of 0%. The table below shows the growth for individual years. While there was a strong recovery in 2010, the network couldn’t sustain it in subsequent years. Given that there is no clear trend and CBS’ ad related broadcasting revenues haven’t shown strong signs of recovery, we take a conservative view and expect long-term growth to remain slow.
|CBS Broadcasting Revenue Growth||-7%||-1%||11%||-3%||-1%|
Potential Valuation Impact
We estimate that the broadcasting business (ad related revenues) constitutes roughly 25% of CBS’ value and is one of its most important businesses. This contribution is based on our expectation that advertising revenues for CBS & CW Network will grow close to $5 billion by the end of our forecast period.
However, if these revenues can sustain a growth rate of 5% for the next several years and reach $6.2 billion by the end of our forecast period, there could be 5-10% upside to our current price estimate. In order to do so, the company will need high investments in original programming to maintain, if not grow, its viewership. It will see support from ad pricing growth as the economy improves.
On the other hand, if revenues remain stagnant, there could be downside of about 5%.
Our price estimate for CBS stands at $46.80, roughly in-line with the market price.Notes:
- CBS Is Said to Attract $2.7 Billion in Upfront Ad Sales, Bloomberg, June 13 2012 [↩]
- Nielsen TV Ratings Age Demographics: J-J-J-Jive Talking, TV By The Numbers, Apr 3 2008 [↩]
- Signals Weak for TV-Ad Market, The Wall Street Journal, Mar 24 2013 [↩] [↩] [↩]
- BRUTAL: 50% Decline In TV Viewership Shows Why Your Cable Bill Is So High, Business Insider, Jan 31 2013 [↩]