Content Licensing Will Be A Key Driver For CBS’s Future Growth Amid Changing Media Landscape

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CBS
CBS

CBS Corporation’s (NYSE:CBS) CBS network has been struggling with lower ratings, and a shift in advertising dollars from television to digital media has put pressure on advertising revenue growth. While the company is likely to see near term growth in advertising from its NFL coverage and increased political spending in 2016, in the medium to long run the company is likely to face the heat from continued growth of alternative video platforms, such as Netflix and Hulu. There are fewer viewers for traditional television than in even recent years and CBS has felt the effect, as have other media companies. While there still remains uncertainty around the ratings environment, the company’s licensing business has grown strongly and is expected to continue this trajectory. In fact, as more avenues of streaming come into the market, CBS may be able to generate more revenues in the form of content licensing fees and add incremental revenues of $2 billion over our current forecast. This could trigger a 10% upside to the stock, in our opinion.

  • Trefis has a $64 price estimate for CBS Corporation’s shares, translating into a $31 billion market cap. This is roughly 45% ahead of the market price of around $44.
  • We estimate the company’s 2015 revenues to be around $14 billion for earnings per share of $3.30, compared to consensus of $3.41, according to Reuters.

See our complete analysis for CBS

Recent Decline In Television Ratings

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CBS and other broadcasting and cable networks have felt the heat from declining viewership amid growth of alternative video platforms and a shift in advertising dollars to digital avenues. The network’s ratings declined 17% in 18-49 primetime demo for 2013-14 television season. [1] Looking at 2014-15 television season, CBS posted 4% drop in demo ratings. [2] However, it continues to be the most watched network for 7th year now. Given the decline in ratings, advertising revenues have taken a hit. CBS & CW Network ad revenues declined 8% in 2014 to $4.45 billion and the trend in 2015 points towards another decline. [3] We currently estimate the segment revenues to be around $4.25 billion in 2015. However, the figure is likely to rise in 2016 given that CBS will air Super Bowl 50 and it will also benefit from increased political campaign spending. In the medium to long run, we don’t expect much of growth from current levels and estimate the segment revenues to be around $5 billion in the out years of our model (to 2022). Having said that, CBS will see solid growth at its licensing business, which is a direct beneficiary of growth in digital video platforms.

A Snapshot of CBS’ Licensing Business

CBS produces regular TV shows and films, which it licenses to other television networks and video-on-demand services. The studio has produced several TV series, including NCIS, Elementary, Extant and Vampire Diaries, among others. Most of these shows are aired on CBS while some of them it licenses to other networks. Given the popularity of CBS’ shows on television, especially in the desired 18-49 demographics, the company has been aggressive in leveraging them outside the traditional television and has struck several licensing deals with streaming providers such as Amazon Prime, Hulu, Starz and Netflix.

More Licensing Avenues Can Catalyze The Segment Growth

Looking at the segment revenues, they have grown at an average annual rate of 7% in the last 5 years, from $2.8 billion in 2009 to $3.9 billion in 2014. [3] With more avenues to distribute and stream the content, media companies have been able to grow the distribution and licensing revenues. We maintain our view that there is a place for both streaming and traditional television to co-exist in the foreseeable future and accordingly, we expect this uptrend to continue in the coming years. We estimate the segment revenues to be north of $5 billion by the end of our forecast period. An estimated EBITDA margin of over 22% will translate into EBITDA of $1.2 billion, representing more than 20% of the company-wide EBITDA.

With continued growth in demand for alternative video platforms, the content owners can earn more licensing revenues. Nielsen recently started tracking viewership trends on streaming services. [4] This was much awaited by media companies as ratings measurement can help the content owners, such as CBS, in negotiating the right price for their programming. Also, with more distribution options such Sony’s Web TV and Dish’s Sling, which are new entrants into this market, distribution and licensing revenues can see significant growth in the coming years. This is one avenue which the media companies can look upon to offset some of the declines seen on the traditional television front.

Potential Upside Scenario

The streaming players usually ink deals for individual shows rather than an entire library and this makes it important for content providers to focus on original programming and come up with new shows periodically. Also, there is stiff competition for content as more players are developing in-house programming. For instance, Netflix itself has a handful of in-house shows, including the popular House of Cards. Owing to these factors, we take a conservative view in our pricing model and 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 new entrants into the streaming arena. Given the trends in the television industry, it appears the future 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 add incremental revenues of over $2 billion in the coming years. This would trigger a 10% upside to the stock, in our estimation.

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Notes:
  1. NBC Wins the 2013-14 TV Season, for First Time in 10 Years; CBS Is Still Most Watched Network, TV Line, May 20, 2014 []
  2. NBC Set To Eke Out 2014-15 TV Season Demo Win Over CBS Thanks To Super Bowl, Deadline, May 19, 2015 []
  3. CBS Corporation’s SEC Filings [] []
  4. Netflix Viewership Finally Gets a Yardstick, The Wall Street Journal, Aug 26, 2015 []