Earnings Preview: Watchout For CBS’ Advertising Income In Q4

CBS Corporation (NYSE:CBS) will report its Q4 2014 earnings on February 12th. We believe that CBS will report that it benefited from its NFL coverage and higher political spending in Q4. Some of the CBS’ shows, including Mom, have seen ratings growth in the current television season. This will will allow for advertising revenues for the media company. The company is also seeing growth in its non-advertising income, which now accounts for more than 50% of its overall revenues and grew 2% in the first nine months of 2014. This growth has been led by higher retransmission income and affiliate fees. The advertising trends are uneven as they are driven by various events. It is thus important for CBS to increase its reliance on more stable sources of income such as subscription and affiliate fees. We believe this trend will continue in the coming years and with higher growth in the non-advertising income.  CBS thus can look forward for a stable growth outlook in the long run.

We estimate revenues of about $14 billion in 2015 and currently have a $52 price estimate for CBS Corporation, which we will update after the fourth quarter earnings announcement.

See our complete analysis for CBS

Watchout For Advertising Revenues At CBS Entertainment Division

The entertainment division, which includes, CBS Television Network, has seen lower EBITDA in the recent past primarily due to an increased investment in NFL programming. CBS paid $275 million for the rights of 8 Thursday pro football matches in 2014. NFL programming was very successful for CBS and drove the network’s ratings. CBS charges close to $500,000 for a 30 second spot for its Thursday Night Football telecast. The company also renewed its deal with NFL for $300 million for 2015 rights. ^[1] Apart from sports, some of CBS’ shows such as Mom are driving a ratings uptick of 17% in 18-49 demographic and 40% jump in total viewers in the current television season. ^[2] Looking at the 2014-15 television season, CBS continues to be the most watched network averaging 11.6 million viewers. However, it is nevertheless at the second spot in ratings after NBC. The ratings growth will drive the advertising income for CBS. The overall U.S. advertising market is growing and advertisers are willing to shell out more money. Television still remains the biggest medium for advertisements and content owners will benefit from this broad level improvement. Television ad spending will continue to grow by 3% annually until 2017, according to a research by ZenithOptimedia. In November 2014, the overall broadcasting spend was up 3% while CBS saw a 6% growth. ^[3]

Continued Growth At CBS’ Cable Networks

CBS’ cable networks include the Showtime networks, the CBS Sports Network, and the Smithsonian networks. The 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. ^[4] The appeal of Showtime has primarily led this growth. Its shows such as Dexter and Homeland have done well in the past. Also, the contracts between media companies and pay-TV service providers include pre-defined yearly subscription rate increases. Looking at the first nine months of 2014, cable networks revenues grew over 5% to $1.67 billion. We believe the above factors will continue to drive growth for CBS’ cable networks in the coming years. Accordingly, we estimate cable networks’ revenues will 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, representing 30% of the company wide EBITDA by end of the decade.

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1. CBS, NFL Renew Deal For ‘Thursday Night Football’, Variety, Jan 18, 2015 [↩]
2. CBS 2014-15 Season Ratings, TVSeriesFinale, Feb 7, 2015 [↩]
3. SMI: TV Ad Spending Down 2% in November, Broadcasting & Cable, Dec 17, 2014 [↩]
4. CBS Corporation’s SEC Filings [↩]