CBS Shows Dip In Revenues But Key Drivers Are Still Rock Solid

August 7th, 2012 by Trefis Team
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CBS
CBS

CBS (NYSE:CBS) recently reported its Q2 2012 earnings, roughly inline with our expectations. Advertising revenues fell slightly despite the company garnering better ratings compared to its competitors. It is generally seen that CBS’ broadcasting revenues tend to be lower in Q2 compared to Q1.  However, the decline compared to Q2 of 2011 was something that we didn’t fully anticipate. CBS states that Comcast’s (NASDAQ:CMCSA) NBCUniversal attracted a disproportionate amount of advertising dollars due to its Olympics broadcast rights and that impacted its own ad revenues. [1]

If this is the case, shouldn’t we expect ad revenues to be impacted in the next quarter too? CBS takes a different stand here and expects ad revenues to grow in the latter half of the year on several factors including Olympics, political ad spending and improvement in auto advertising. [2] Perhaps weaker scatter volume at the end of 2011 still weighed in on Q2 2012 results as we previously anticipated.

Nevertheless, we see some positives and the slowdown in ad sales should not be a significant issue.

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See our complete analysis for CBS

Short-Term & Medium-Term Drivers

As mentioned above, the company’s ad sales in the second half of 2012 will benefit from political advertising and improving ad spending by automotive manufacturers, especially the Japanese car makers. CBS has widened its lead over competitors in terms of ratings and that will help in the short term. [2] Affiliate fee will continue to grow as the company’s cable networks see demand, leading to growth in subscriber base as well as rates.

International syndication is a growing business for CBS, and we account this under the TV Licensing & Other division, which contributes close to 20% to the company’s value. In 2013 and 2014, four of the company’s hit shows, Hawaii Five-0, NCIS: Los Angeles, The Good Wife and Blue Bloods, will be syndicated internationally. In the past, the company has seen improved licensing revenues from syndication of its hit shows like CSI.


Long-Term Drivers

From a long-term perspective, CBS seems to be well-positioned with improved margins and growing online licensing and re-transmission fee. The last two elements are not significant yet, but growth exists. And, with the changing dynamics of the pay-TV industry, revenues from these two growing streams will be increasingly important. This bodes well for the margins as well.

Investors should be aware that given the tremendous improvement in the past couple of years, CBS has limited scope to grow its margins. Banking on margin sustainability rather than growth is likely to be a better decision.

We are in the process of updating our pricing model for CBS in light of the recent earnings and will have an update ready soon.

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

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Notes:
  1. At CBS, Fees Help Make Up for Ads, The Wall Street Journal, Aug 2 2012 [↩]
  2. CBS’ Q2 2012 Earnings Transcript [↩] [↩]