CBS’ Q1 Earnings Likely Boosted By Higher Affiliate And Retransmission Fees

CBS Corporation (NYSE:CBS) will report its Q1 2015 earnings on May 7th. We believe that CBS will report continued growth in its non-advertising income from subscription and retransmission consent. However, advertising income likely trended lower since the network had one less Playoff game in the March quarter as compared to the prior year period. The advertising trends are uneven as they are driven by various events, from one quarter to the next. It is thus important for CBS to increase its reliance on more stable sources of income, such as subscription and retransmission fees. The company has so far been successful in doing that and the contribution of non-advertising income to total revenues has increased from 43% in 2009 to a little under 50% in 2014. We believe this trend will continue in the near term as well as in the long run and drive growth for the company.

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.

See our complete analysis for CBS

Watchout For Advertising Revenues At CBS Entertainment Division

CBS has seen ratings pick up for some of its shows including, Mom and Two and a Half Men in the current television season. Overall, the network saw a viewership growth of 5% for the season by the end of first quarter. ^[1] CBS continues to be the most watched network, averaging 11.3 million viewers nightly. The network will face a tough test in the upfront pitch, scheduled for May 13th, as advertisers are moving away from traditional television to digital and social media to reach consumers. Looking at 2014 data, the broadcast television ad revenues declined 4% (excluding Olympics), while digital media formats saw a 28% growth in video and 65% jump in social media ad revenues. Magna Global expects a softer 2015 for U.S. advertising market and a 1.4% decline in overall television advertising. ^[2] Given these trends, it is likely that  advertising income remained soft for CBS in the March quarter, a trend we expect to persist in the near term. These trends may also weigh on the upfront sales for the next season and we will be looking for any update from the company’s management on the topic. Moreover, the March quarter had one less Playoff game on CBS and it will thus be an unfavorable comparison to the prior year period. We currently estimate $8.47 billion revenue for the entertainment division in 2015 and an estimated EBITDA margin of 22% will translate into EBITDA of close to $1.87 billion, representing around 45% of the company wide EBITDA.

Continued Growth At CBS’ Cable Networks

CBS’ cable networks have seen a solid subscriber growth over the past few years, growing from 54.8 million subscribers in 2007 to 76.0 million subscribers in 2014. With this rise in the subscriber base, cable networks revenues also grew from $1.16 billion in 2007 to $2.18 billion in 2014. ^[3] 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 now focused on bringing in more programming including, HAPPYish and Billions. Looking at the current quarter, the company will surely benefit from Showtime’s recent coverage of the Mayweather and Pacquiao match, which was a very successful pay-per-view event. We currently estimate cable networks’ revenues to be around $2.30 billion in 2015 and an estimated EBITDA margin of 48% will translate into EBITDA of $1.10 billion, representing more than 25% of the company wide EBITDA.

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1. CBS WINS THE WEEK IN VIEWERS WITH SIX OF THE TOP 10 BROADCASTS, CBS Press Release, Apr 4, 2015 [↩]
2. MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Mediabrands, Dec 8, 2014 [↩]
3. CBS Corporation’s SEC Filings [↩]