How Are CBS’ Cable Networks Trending?

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, which are commercial free premium channels and generate revenue primarily from affiliate fees and distribution of their networks. The segment contributed 16% to CBS’ overall revenues and 27% to its EBITDA in 2014. We believe that Showtime’s focus on original programming will drive the cable networks business in the coming years. On that note, we discuss below the trends in CBS’ cable networks and our forecasts and estimates.

We estimate revenues of about $14 billion for CBS Corporation in 2015 with EPS of $3.60, which is in line with the market consensus of  $3.60 compiled by Thomson Reuters. We currently have a $58 price estimate for CBS Corporation, which is around 5% below the current market price of $61.

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How Are CBS’ Cable Networks Trending?

CBS’ cable networks include the Showtime networks, the CBS Sports Network, and the Smithsonian networks. 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. Showtime networks have seen solid subscriber growth over the past few years, growing from 54.8 million subscribers in 2007 to 76 million subscribers in 2014. ^[1] With the rise in subscriber base, CBS’ cable networks revenues also grew from $1.16 billion in 2007 to $2.18 billion in 2014. 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, Homeland, Masters of Sex and Ray Donovan have done well in the past.

The network is bringing in more programming in the near term with HAPPYish scheduled to premiere on April 26th. Showtime has recently ordered Billions, a drama series about power politics set in New York City’s financial industry, for 12 episodes. The series is slated for a 2016 premiere. ^[2] In the near term, it will be the Mayweather and Pacquiao match that will drive the network revenues. Showtime has an exclusive, six-fight contract with Mayweather while Time Warner’s (NYSE:TWX) HBO has a contract with Pacquiao. Both networks have teamed up for the coverage of one of the most anticipated events in 2015. Subscribers will have to pay $89 for the pay-per-view (PPV) event, the highest ever for a boxing match. The match could top three million PPV purchases, translating into revenues north of $300 million for the media networks. This surely will boost CBS’s top line as well as bottom line in the second quarter.

In the long run, we believe cable networks will continue the uptrend, driven by the appeal of Showtime’s content and continued subscriber growth. 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. Also, over the past few years, the cable networks have risen in popularity owing to their specific focus. This has helped them create a loyal audience base and, consequently, broadcast networks have suffered in terms of viewership. We estimate cable networks’ revenues to grow to $3.40 billion by the end of our forecast period. An estimated EBITDA margin of 49% will translate into EBITDA of $1.65 billion, representing 30% of company-wide EBITDA.

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1. CBS Corporation’s SEC Filings [↩]
2. SHOWTIME Orders New Drama Series BILLIONS For 12 Episodes, Showtime Press Release, Mar 25, 2015 [↩]