CBS Earnings Will Provide A Needed Update On Ad Business Trends

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CBS (NYSE:CBS) will report its Q2 2012 earnings on upcoming Thursday, Aug 2 2012. As usual, the strength of advertising market and the company’s margins will be in focus. CBS’ stock has risen substantially riding on the wave of improving margins and high ratings. Will it be the same story this quarter? Let’s take a look at what to expect from CBS’ upcoming earnings.

See our complete analysis for CBS

CBS Will Benefit From Strong Ratings & Ad Pricing Growth

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When CBS reported its earnings last quarter, the company stated that as it heads into Q2, the scatter pricing and ad inventory sales remained good. Nevertheless the scatter volumes were not that good for the media industry in general at the end of 2011. Will this weigh on Q2 results that will depend, to a certain extent, on scatter pricing and volumes? If we look at historical data, we find that CBS’ Q2 results, especially specific to its broadcasting segment, tend to be a little weaker compared to Q1. The above two factors suggest that the company may feel some negative impact.

However, CBS’ ratings suggest otherwise. While other broadcasters have suffered ratings decline in Q2 2012 compared to the same period an year ago, CBS has been able to improve. [1] While CBS posted gain of over 8%, the big four broadcast networks together declined in terms of ratings. [1] This implies that CBS will post year-over-year improvement and relatively a stronger performance when compared to other broadcast networks.

Watch Out For More Color Ad Sales Strategy

The new TV season is beginning and the upfront ad pricing will play an important role in determining near-term performance of CBS. Upfront represents the ad inventory that is sold at the beginning of the TV season. It constitutes the majority of the ad inventory sold. Forecasts indicate that the upfront ad growth will not be as stellar as last year’s and may grow by mid-single digits. [2] However, when CBS recently finalized its deals, it was reported that the company saw flat dollar volume but healthy 9% growth in upfront ad pricing. [3]

This implies that while CBS’ content is in-demand, the company is holding on to more inventory than last time to sell it later in the season. Why is CBS doing so? Does it expect increased demand from advertisers in later quarters? Investors should watch out for indications from the company that might shed some more light on the state of advertising market as we head into the latter half of the year. This will be closely tied to the state of the economy.

Expect Continued Improvement In Margins

Driven by ad pricing growth and increase in licensing revenues, we expect continued growth in margins compared to Q2 of the last year. Nevertheless we note that last 2 years were special in terms of turn-around. Such margin growth can not continue forever and going forward, CBS may see some saturation in terms of margin growth potential.

Our price estimate for CBS stands at $34.75, implying a premium of less than 5% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. Analyst: Broadcast Took a Pounding in Q2,, July 16 2012 [] []
  2. TV Networks Will See Just Mid-Single Digit Growth In Upfront Ad Prices: Analyst,, May 29 2012 []
  3. CBS Wraps Final Upfront Deal,, Jun 12 2012 []