Showtime Will Continue To Drive Growth For CBS’ Cable Operations

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CBS Corporation‘s (NYSE:CBS) cable networks have seen phenomenal growth over the past few years primarily driven by the success of its Showtime networks. Shows such as Homeland and Dexter have done well in the past and new programming such as Ray Donovan and Masters of Sex have also performed well in their premiere seasons.  Showtime networks are commercial free premium channels and generate revenue primarily from affiliate fees and distribution of their networks. The segment contributed 14% to CBS’ overall revenues and 21% to its EBITDA in 2013. We believe that Showtime’s continued focus on original programming will drive the cable networks business in the coming years.

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A Brief Snapshot of CBS’ Cable Networks

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CBS’ cable networks include the Showtime networks, the CBS Sports Network, and the Smithsonian networks. Showtime networks consists of premium TV channels: Showtime, Flix and The Movie Channel. These premium TV channels offer a variety of programming to cable and satellite subscribers in the U.S. who pay additional monthly premiums for access to these channels. For instance, Comcast (NASDAQ:CMCSA) customers need to pay an additional $10 on most of the pay-TV packages to get the Showtime channel. CBS Sports Network shows programming based on college sports, especially athletics. Showtime networks have seen a solid subscriber growth over the past few years, growing from 54.8 million subscribers in 2007 to 76 million subscribers in 2013. With the rise in subscriber base, cable networks revenues also grew from $1.16 billion in 2007 to $2.07 billion in 2013. [1]

What Is Driving The Growth?

The appeal of Showtime has primarily led this growth. Flix airs classic movies, which differentiates it from other channels airing more contemporary movies, and reality shows as well. Showtime’s compelling original programming also has been on a roll. Its shows such as Dexter and Homeland have done well in the past. Last year, the network came up with two new hits, Masters of Sex and Ray Donovan. Both these shows saw good ratings in the first season. However, season 2 ratings have declined by 33% for Masters of Sex and 6% for Ray Donovan as of September 9, 2014.

Homeland has been the star series for Showtime over the past three years. In 2011, the premiere season averaged 4.23 million average weekly viewers across platforms. In 2012, into its second season, the show continued to outperform averaging 5.9 million weekly viewers, up 37% over the first season. Last year, the show returned for its third season and continued to break records in terms of viewership and became the first show to cross 7 million average weekly viewers for the network. The show has won many awards including the 69th and 70th Golden Globe Awards for Best Television Series – Drama. It will return for its fourth season with the premiere episode airing on October 5, 2014 and we are eager to see how the ratings trend in 2014. Meanwhile, shows such as Homeland continue to aid subscriber growth for the Showtime network.

Furthermore, the contracts between media companies and pay-TV service providers are long-term, and include pre-defined yearly subscription rate increases. Given the demand for good content, CBS’ cable networks will continue to benefit from these yearly increases. We believe the above factors will continue to drive growth for CBS’ cable networks in the coming years. Accordingly, we estimate cable networks’ revenues to grow to $3 billion by the end of our forecast period. An estimated EBITDA margin of 49% will translate into EBITDA of $1.5 billion by 2021. It must be noted that there could be a potential upside of 10% to our price estimate if the cable networks continue to grow at a higher pace and revenues are north of $4 billion by the end of our forecast period. On the other hand, there is a downside risk of more than 5% to our price estimate, if the growth rate is lower and cable networks revenue remain rangebound around $2.5 billion by the end of the forecast period.

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Notes:
  1. CBS Corporation’s SEC Filings []