CBS Price Estimate Revised To $61 Given Q2 Results And Outdoor Split

CBS Corporation (NYSE:CBS) in the second quarter posted 4% growth in adjusted EPS while net revenues and EBITDA declined by more than 5% to $3.19 billion and $801 million, respectively. ^[1] It must be noted that in the prior year quarter, the company benefited from large international syndication sales of CBS and Showtime and the telecast of NCAA tournament semifinals, which were on Turner this year. This led to a decline in revenues and EBITDA. Advertising revenues also declined by 7% to $1.64 billion. The absence of the NCAA telecast on CBS and  an overall sluggish advertising market weighed on the advertising income. However, we continue to believe that CBS will see much better second half of 2014, driven both by the telecast of NFL Thursday Night Football games and higher advertising revenues from  the U.S. midterm elections. The company has successfully completed the separation of its outdoor advertising business and we have updated our model to reflect the impact of the split. We have estimated the revenues for the first two quarters of 2014 to be around $500 million and have forecast zero income from this business in the coming years. We will be completely removing this segment from our model after the 10-k is filed by CBS for 2014 with details of balance sheet items and the cash flows.

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Lower Advertising Weighed Over Entertainment Division

While the revenues at cable networks division were flat at around $516 million, EBITDA was up 6% to $219 million due to growth in affiliate revenues and lower programming costs. However, the entertainment division saw a 9% decline in revenues and a 12% decline in EBITDA due to lower advertising income. ^[2] If we look at the CBS television network, it ended the 2013-14 season in second place after NBC, with a 2.4 rating. Overall ratings declined by 17% over the last season. ^[3] This in part can be attributed to the absence of Super Bowl. The network’s established shows such as The Big Bang Theory and NCIS are also seeing drop in ratings in the coveted 18-49 demographic. However, if we take into account total viewership, CBS continues to stay at the top with season average of 10.64 million viewers, ahead of NBC with 9.21 million viewers. ^[2]

The network has come up with strong slate of summer programming with programs such as Under The Dome and Extant. However, ratings were not impressive for either of the shows. CBS will largely rely on its sports programming to get a boost in its advertising income. The network has secured rights to telecast NFL’s Thursday night football matches. It must be noted that the comparability will be negatively impacted from the third quarter due to cost increases over the company’s agreement with the NFL.

Split of Outdoor Business Positive For The Company

CBS completed the divestiture of its outdoor business in the second quarter. CBS Outdoor Americas was spun off as an independent company in March 2014. The split of outdoor business is a step in the right direction, as this will take the revenue contribution of non-advertising income to 50% for CBS. The company currently derives a significant portion of its revenues from advertising income while content licensing, affiliate and subscription fees make up for the rest. The advertising trends are uneven, driven by the variable occurrence of political campaigns and sports events. It is thus important for content owners to increase its reliance on more stable source of income such as subscription and affiliate fees. The split with outdoor business will ensure stable growth for CBS in the long run.

CBS’ outdoor business generated revenues of $1.3 billion in 2013. The estimated EBITDA margin of 34% for outdoor segment translates into EBITDA of $438 million, representing 10% of CBS’ overall EBITDA for 2013. ^[4] The outdoor segment earlier contributed close to 7% to CBS’ value, according to our estimates. However, given the split of this business, the contribution has now come down to zero.

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1. CBS’s (CBS) CEO Leslie Moonves on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Aug 7, 2014 [↩]
2. CBS Corporation’s SEC Filings [↩] [↩]
3. 2013-2014 Season: NBC Leads Among Adults 18-49 & CBS Tops Total Viewers Through Week 35 Ending May 25, 2014, Zap2it, May 28, 2014 [↩]
4. CBS Outdoor Americas’ SEC Filings [↩]