Publishing Decline At CBS Should Not Alarm Investors

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CBS Corporation’s (NYSE:CBS)  publishing business has been on a decline over the past few years led by lower print sales. While the company is seeing strong growth in digital sales, print sales remain subdued. For now, digital sales are unable to offset the declines in print media. However, that is likely to remain the case in the long run. We believe the company will continue to see a revenue decline in book publishing while digital sales will see steady growth. With the growth in digital sales, which have lower production and distribution costs, CBS can look forward to better segment margins. While the growth rate of e-book sales has slowed in the recent past, there is a healthy market for both print as well as digital editions of books to co-exist. Having said that, investors should not be alarmed with the decline in the publishing segment as it accounts for less than 3% of CBS’ stock value, according to our estimates. Accordingly, even a slower growth in digital sales or a higher-than-expected decline in print media would have a limited impact on the company’s stock price.

See our complete analysis for CBS

E-Book Sales Have Slowed Down But Outlook Remains Positive 

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Growth in e-book sales have slowed in the recent past. However, we continue to believe that it will have a place in the future of book publishing. After launching iBook, Apple (NASDAQ:AAPL) said that it added 1 million new iBook users every week after it was preinstalled on Apple devices following the iOS8 release. [1] While this growth for Apple can partly be attributed to its family sharing feature, this also reflects that there is a huge market for e-books. PriceWaterhouseCoopers also claims that e-book sales will exceed print sales by 2018. [2] While we also believe that e-books will be the leader in unit sales, it may not happen in the short to medium term. For instance, in 2014, only 26% of the U.S. unit sales were e-books while hardcover and paperbacks made up the rest. [3] Looking at this data, it appears that it may take longer for e-books to become the leader in unit sales.

Digital Sales Will Improve EBITDA Margins

CBS’ book publishing segment consists of Simon & Schuster, which publishes books in print, audio and digital formats. Revenues are generated from the sale of these books to readers. Book publishing is a mature and stable industry. Like the movie industry, new titles constitute a major portion of the revenues for a year. Also, revenues are hit-driven with top 10 titles accounting for a significant portion of the annual revenues. The company was quick to move to a digital platform and provides several e-book titles across devices such as Amazon Kindle. However, digital sales were not enough to offset the declines in print sales and CBS’ book publishing revenues declined from close to $900 million in 2007 to around $775 million in 2014. [4] Having said that, the company is seeing high growth in digital sales and now accounts for 26% of the segment revenues. This compares with 22% for News Corp’s (NASDAQ:NWSA) HarperCollins. Since digital books have lower production and distribution costs than print books, this has aided the segment margin growth in the past few years, and we expect it to continue this trajectory. We currently estimate segment revenues to be around $670 million by the end of our forecast period and an estimated EBITDA margin of 20% will translate into EBITDA of $130 million, representing 2% of the company-wide EBITDA.

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Notes:
  1. The ebook is dead. Long live the ebook, The Guardian, Feb 1, 2015 []
  2. PwC Claims eBook Sales Will Exceed Print in 2018, Digital Reader, Nov 18, 2014 []
  3. US e-book sales down 6% in 2014, The Bookseller, June 1, 2015 []
  4. CBS Corporation’s SEC Filings []