CBS Corporation (NYSE:CBS) will report its Q2 2013 earnings on July 31.  While we expect the cable business to continue to grow on increased digital licensing and growing retransmission fee, advertising revenue may lack high growth on muted ad spending in North America. The company’s broadcasting network in Q1 2013 had benefited from the improvement in ad pricing and the success of certain big events such as Super Bowl. CBS expects to continue to do well in the near term with a strong prime-time lineup and growth in upfront ad pricing for the new season.
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CBS operates premium cable networks such as Showtime, which are ad-free and thus rely on quality content that allow the company to charge a high fee per subscriber. We note that CBS’ cable networks business has been growing in the past few years fueled by growth in subscribers, rising subscription fees and growth in licensing revenues. The trend will continue as demand for premium programming exists. Showtime networks, which include Showtime, The Movie Channel and Flix has more than 77 million subscribers. 
From a long-term perspective, 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 in the past few years. Affiliate and subscription fees increased 14% in Q1 2013 primarily due to 62% growth in retransmission revenues and network affiliation fees.  Given these trends, we expect future growth to remain healthy.
Advertising Spend Remains Flat
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.  We feel that revenues from local TV stations and CBS radio will not experience substantial growth. There are no major catalysts in the near future and growth will be driven by the general improvement in the U.S. advertising market, which is not visible this year. Total ad spending in North America remained flat in the first quarter of 2013 while global advertising grew just 1.9% to $76.6 billion from the first quarter of 2012.  However, TV ad spending growth continues to exceed the industry average, according to Kantar Media figures. After leading the ad market in the second half of 2011 and entire 2012, the TV ad growth was marginal in Q1 2013. Earlier, the growth was fueled by political and Olympic dollars and this year the muted spend is a result of a 5.2% decline in network TV revenues due to weaker ratings and ad dollars for the NCAA Final Four (National Collegiate Athletic Association) games were moved out of Q1 and into April. 
Our price estimate for CBS stands at $50, roughly in line with the market price.Notes: