Three Scenarios That Could Have A Meaningful Impact On CBS’ Stock Price
CBS Corporation’s (NYSE:CBS) broadcasting network has been struggling with lower ratings and a shift in advertising dollars from television to digital has put pressure on revenue growth. Advertisers are not willing to spend more on traditional television, as they are increasing budgets towards online video and social media. Advertisers committed between $8.17 billion and $8.94 billion for the 2014-15-primetime slate on broadcast, down close to 5% from the prior television season. [1] Over the next few years, we expect ratings to stay around the current levels. However, there still remains uncertainty around the ratings environment, which suggests room for stock price movement depending on how the audience receives the programming in the next couple of years. Specifically, we believe continued growth of alternative video platforms and higher ad spending on other platforms could put more pressure on CBS’s broadcasting operations and drag the stock price lower. Having said that, the rise of alternative video platforms also opens up an opportunity where CBS’ programming can see explosive growth in licensing revenues and catalyze the stock price movement. CBS also launched an over the top streaming service for its Showtime network, which if successful could further catalyze the company’s stock price.
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CBS’ Ratings Continue to Fall At 5% Annually (-10% Downside To Stock Price)
We estimate that CBS and CW networks contribute over 20% to CBS’ stock value. CBS is one of the Big 4 broadcasting networks in the U.S. and offers a wide variety of programs reaching out to a large audience. It is also the most watched network in the U.S. The broadcasting networks derive revenues primarily from advertising and retransmission consent. Television currently accounts for close to 42% of all U.S. advertising and it is expected to drop to 40% by 2018, according to a research by Strategy Analytics. [2] However, this downturn will primarily be due to a rise in ad spending at other platforms and television ad spending is expected to grow in low-single digits. Much of this growth is likely to come from cable networks. Over the course of the past few years, the cable networks have risen in popularity owing to their specific focus. This has helped them create loyal audience base and consequently broadcast networks have suffered in terms of viewership. CBS’ ratings declined 17% in 2013-14 television season and 4% in 2014-15 television season. The decline in ratings can also be attributed to the rise of alternative video platforms such as Netflix (NASDAQ:NFLX), Amazon’s (NASDAQ:AMZN) Amazon Prime and Hulu.
We believe this trend will continue and weigh over broadcasting networks such as CBS in the coming years and any significant revenue growth from the current levels in unlikely. Overall CBS and CW advertising revenues have grown marginally from around $4.30 billion in 2010 to $4.45 billion in 2014. [3] We expect the advertising revenues to continue to grow in low-single digits in the coming years and be around $5 billion by the end of our forecast period. Much of this growth will come from a higher ad pricing, which will offset some of the decline in volumes. Moreover, increased political spending in 2016 will further aid to the overall advertising revenues.
Having said this, it is possible that we are underestimating the shift in growth of digital platforms and social media, as the recent decline in ratings is not limited to CBS but far more widespread to most of the broadcasting as well as cable networks. Also, advertisers are allocating higher budgets towards the digital platforms. The broadcast television declined by 4% (excluding Olympics) in 2014. This dismal performance can be attributed to competition from digital media formats, which saw 28% growth in video and a 65% jump in social media ad revenues. [4] If the ad spending on television declines at a higher pace amid lower ratings at CBS, it could lead to a revenue loss of over $1 billion over the next few years, reducing our price estimate and EPS for 2020 by 10%. Here, we assume the advertising revenues to decline at a low single-digit rate.
Licensing Revenue Growth Of 10% (+15% Upside To Stock Price)
The good part about more viewing options is that the content owners earn more licensing revenues. CBS’ content is currently available on Netflix, Amazon Prime and Hulu. Also, with more streaming options such as Apple’s (NASDAQ:AAPL) proposed streaming service and Sony’s Web TV, which is a new entrant into this space, licensing revenues can see significant growth in the coming years. It has been learned that Apple is in talks with CBS for its content, while the broadcasting network is already available on Sony’s streaming service. [5] [6] We still take a conservative view in our pricing model, owing to an expected increase in competition in the media industry. Accordingly, we assume CBS’ TV Licensing & Other revenues to grow from around $3.85 billion in 2014 to $5 billion by the end of our forecast period. However, streaming service providers such as Sony are just some of the few entrants into the streaming arena. Given the trends in the television industry, it appears the future will hold a place for both platforms to co-exist and we will see many more players offering the streaming service. In such a scenario, content owners such as CBS could see explosive growth in content licensing and incremental revenues of over $2 billion in the coming years. This will add 15% to the company’s value. This impact will come not only from improved revenue growth, but also from an increase in EBITDA margins.
Showtime Streaming Subscriber Base Of 7.5 Million (+10% Upside To Stock Price)
Showtime offers a standalone streaming service, primarily targeting broadband-only homes and others who haven’t subscribed to the network. There are more than 10 million broadband-only homes, as well as an additional 90 million homes in the U.S. that do not subscribe to Showtime. Given the rise of alternative video platforms, it becomes important for certain standout and premium networks such as HBO, ESPN or Showtime to make their programming available on different platforms. For instance, a broadband-only subscriber likes to watch movies or Homeland TV series and he or she can opt for Showtime’s streaming service without a pay-TV connection at a less than one-fifth cost.
While there is appears to be a massive growth opportunity for Showtime in the streaming arena, we take a conservative view in our pricing model, owing to expected increase in competition in the media industry. Accordingly, we currently assume 3.5 million subscribers by the end of our forecast period. Nevertheless, given the demand for Showtime’s content, a standalone service may look attractive to many customers. If the network does manage to gain an overall streaming subscriber base of 7.5 million at $11 price tag, it would translate into revenues of around $1.30 billion annually. This would add around 10% to the company’s stock value.
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- Upfront 2015: Time May Be Running Out for Primetime TV, Variety, Mar 16, 2015 [↩]
- 2015 Ad Spend Rises To $187B, Digital Inches Closer To One Third Of It, Tech Crunch, Jan 20, 2015 [↩]
- CBS Corporation’s SEC Filings [↩]
- MAGNA GLOBAL Forecasts Global Advertising Revenues to Grow by +4.8% to $536 billion in 2015, IPG Mediabrands, Dec 8, 2014 [↩]
- Apple Plans to Offer ABC, CBS, Fox Through Apple TV, Bloomberg, Mar 18, 2015 [↩]
- Sony Starts $50 PlayStation Vue Web TV Service in 3 U.S. Cities, Bloomberg, Mar 18, 2015 [↩]