CBS (NYSE:CBS) recently reported its Q1 2013 earnings. While its cable networks business continued to grow at a healthy rate of 6%, the advertising business saw a significant jump. The company’s broadcasting network (CBS Network) benefited from improvement in ad pricing and success of certain big events such as Super Bowl. CBS expects to continue to do well in the near term with strong primetime lineup and growth in upfront ad pricing for the new season. In addition to this, margins continued to improve and this has been the major factor behind the stock’s rise in the recent years.
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CBS Network’s Outlook Looks Good
We estimate that close to 55% of CBS’ value comes from advertising related businesses. For Q1 2013, ad revenues grew by 8% and accounted for 61% of the company’s total revenues.  While the ad revenues for local broadcasting business grew by only 3%, CBS Network showed a surge of 14% as it benefited from higher ad pricing as well as the success of Super Bowl. 
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. 
The company expects upfront ad pricing growth in high single digits for the new season.  We have previously expressed some concerns around the secular decline in the viewership of broadcasting networks. However, it appears that CBS is confident about its ability to engage viewers with its quality content, which will also attract higher ad pricing. Let’s take a look at what CBS has in its arsenal.
Broadcasting Viewership Has Been Declining …
The viewership for the U.S. broadcasting networks is declining and 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. 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. 
.. But CBS’ Has Content Advantage
CBS stated that its broadcasting network will end the season as number 1 network across all key demographics.  The revenue growth in the first quarter was driven by strong primetime schedule and broadcast of big events such as the Super Bowl, the AFC Championship Game, the GRAMMYs and the NCAA Men’s Basketball tournament. 
CBS seems to be doing well in key demographics of adults 25-54 and adults 18-49. The network boasts of several shows that have topped their respective categories. For instance, NCIS is maintaining top spot overall while Big Bang Theory has been rated as number one comedy show. In addition to this, Elementary has won the first spot among new shows and 60 Minutes continues to be number one new program. Given that 40% of CBS Network’s primetime shows are 3 years old or less, there is a good chance that the network will continue to garner healthy viewership for the next couple of years. 
Margins Continued To Increase, Cable Networks Business Will Remain Key Long Term Driver
As expected, the company’s overall margins continued to increase due to the growth in cable networks’ subscription fee, a surge in advertising revenues and higher retransmission and streaming revenues.
From long term perspective, 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.
Recently, the company signed Floyd Mayweather and some other boxers who had contract with HBO. The broadcast of well publicized boxing events could drive additional revenues through pay-per-view. In addition to this, CBS acquired a 50% stake in the TV Guide Network, which reaches 80 million homes in the U.S.  Also, new deals with Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) led to double digit growth in streaming licensing revenues.
We are in the process of updating our price estimate for CBS in the light of recent earnings, and will have an update ready soon.
Our price estimate for CBS stands at $46.80, implying a slight discount to the market price.Notes: