CBS (NYSE:CBS) will report its Q1 2013 earnings on May 1. Given that close to 55% of the company’s value depends on advertising related businesses, the growth in the overall advertising market and CBS Network’s ratings will be some of the key determinants of the company’s quarterly results. We expect low growth for CBS network, as higher ad pricing will be offset by weaker ratings to a certain extent. In addition to this, the company’s local broadcasting business (local TV stations and CBS radio) will see the sequential impact of absence of political ad spending and super bowl. However, cable business will continue to show robust growth and overall margins will grow driven by increased digital licensing and growing retransmission fee.
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Cable Networks Will Drive Growth
The cable networks business will continue to be the main driver for CBS’ revenue and margin growth. There is clear evidence that the subscription and licensing businesses have garnered tremendous growth across the industry over the past few years. From $1.16 billion in 2007, CBS’ cable networks revenues grew to $1.77 billion in 2012, implying a compounded annual growth rate (CAGR) of 8.8%. Given these trends, we expect future growth to remain healthy.
If we look beyond CBS, we note that media companies such as Time Warner (NYSE:TWX), Viacom (NASDAQ:VIAB), Disney (NYSE:DIS) and News Corp (NASDAQ:NWS) have seen high growth in their subscription businesses while advertising has struggled. Viacom’s affiliate fee has grown at a CAGR of 10.9% for the last five years driven by growth in subscribers and subscription fee.  The figure for Disney stood at 8.8% while that for News Corp was 17.4%, aided by the disproportionate growth in its international affiliate fee. 
Cable networks focusing on a particular niche or demographic are also gaining popularity due to their investment in original programming. In addition, the pay-TV service providers that carry these cable networks typically enter into multi-year agreements with media companies. Such agreements specify an annual increase in carriage fee, thus ensuring revenue growth even if the subscriber base doesn’t grow much.
Broadcasting Business’ Performance
We expect CBS’ broadcasting business, which includes CBS Network, local TV stations and CBS Radio, to show slow growth at best. While a significant improvement in ad pricing for CBS Network will help, weaker ratings will act as an offsetting factor. On sequential basis, revenue growth might suffer due to the lack of Superbowl and political ad spending.
Ad Pricing Growth
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 better performance from rival NBC in the new TV season, CBS is still doing reasonably well on the back of its quality programming and investment in original content.
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 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. According to research firm Magna Global, the overall ad commitments for TV’s upfront market for the current year could increase by 2%.  While the ad sales for the broadcasting networks will decline by 2%, cable networks will see a growth of 5% in their ad related revenues. 
The table below shows the viewership change for the biggest broadcasting networks in the U.S. for the current season. 
Our price estimate for CBS stands at $46.80, roughly in-line with the market price.Notes: