NFL Coverage And Political Spending Will Aid CBS’ Growth In The Near Term

CBS Corporation’s (NYSE:CBS) recent quarterly results were in line with expectations and warrant no material change in valuation. Solid growth at cable networks was anticipated, reflecting the benefits of the Mayweather fight. However, the key takeaway from the earnings release was the solid subscription trends at its new streaming services. CBS All Access is already closing in on 1 million subscribers within months of its launch. This is encouraging and at the same time signifies the massive demand for streaming services. We continue to believe that CBS’ streaming services will be of great value in the coming years, while broadcasting is expected to see steady growth in the near term led by its sports programming and political spending. We currently have a $58 price estimate for CBS Corporation, which we will soon update to reflect the June quarter earnings release.

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Streaming Service Is An Important Profit Stream For CBS

While it is too early to call, the changing landscape of the media industry is surely creating massive demand for streaming services and other alternative video platforms such as Netflix (NASDAQ:NFLX), which have seen phenomenal subscriber growth in the past few years. Netflix’s subscriber base grew from a little under 22 million in 2011 to more than 40 million subscribers currently. ^[1] CBS’s standalone service, All Access, is already approaching 1 millions subs within months of its launch. ^[2] The company also came up with a similar standalone service for its Showtime network, which is likely to gain popularity in the coming years. Showtime is a premium network with solid hits, including Homeland, Dexter, Masters of Sex and Ray Donovan, among others. The network has only 27 million subscribers on traditional television and the standalone service can help it expand its reach into the 90 million pay-TV households that haven’t subscribed to the network. However, the network will firstly be targeting the 10 million broadband-only homes.

The network rightly sees an immense opportunity to reach out to these homes. Furthermore, CBS in its recent earnings call stated that every 1 million Showtime streaming subs will generate $100 million in profits, which would roughly translate into 60% margins. ^[2] This is not surprising as Showtime offers in-house programming on its streaming service. A platforms such as Netflix needs to acquire programming rights for the content it wants to make available on its service, which naturally compresses margins. In fact, that’s one of the reasons why Netflix is aggressively eyeing original programming, with shows like House of Cards. Unlike Netflix, Showtime as well as HBO will enjoy much higher margins for the programming that they offer on their standalone services. For now, we estimate there will be 3.5 million streaming subscribers for Showtime by 2021. 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 a $11 price tag, it would translate into revenues of around $1.30 billion and EBITDA of $750 million annually, adding more than 10% to CBS’ stock value.

CBS Broadcasting Will Likely See Steady Growth In The Near Term

While most of the broadcasting networks are going through tough times with declining ratings amid growth of digital platforms, CBS has managed to stay at the top in total viewership with an uptick in ratings. Also, the network is riding high on retransmission consent and reverse comp, which is likely to surpass $1 billion next year and $2 billion by 2020. ^[2] CBS is likely to see steady growth in revenues despite ratings concern in the near term due to its sports programming. CBS will cover NFL programming, including Thursdays, Sundays and Super Bowl 50 in the upcoming season. Looking at the Super Bowl, a 30-second ad spot is currently being sold at $5 million, which is big for any network. The company has already sold much of its inventory for 2015-16 television season in upfront sales, with a slight uptick in rates. It is also seeing double-digit growth in scatter pricing, which will ensure an overall uptick in advertising revenues. Furthermore, 2016 is a Presidential election year and the broadcasting networks at large will benefit from higher political spending. Political ad spending for the event is expected to grow over 12% to $4.40 billion as compared to 2012. ^[2] Given that CBS is the most watched network, it will have a natural advantage of receiving a sizeable chunk of this amount.

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1. Netflix’s SEC Filings [↩]
2. CBS (CBS) Leslie Moonves on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, Aug 5, 2015 [↩] [↩] [↩] [↩]