Key Takeaways From CBS’ Q3 Earnings

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CBS Corporation (NYSE:CBS) reported mixed fiscal third quarter results on November 2, as its earnings came in ahead of expectations but revenues missed. The company’s stock slid slightly after the Q3 results announcement, largely due to declines in advertising sales, offset by growth in affiliate and subscription fees.

In Q3, CBS’ total advertising revenue fell 5% y-o-y to $1.1 billion, primarily due to a difficult comparison to last year’s political spending. The company’s content licensing and distribution revenue for the third quarter declined 22% y-o-y, due to the timing of content availabilities. In terms of affiliate and subscription fees, the robust 52% y-o-y increase was aided by the Mayweather-McGregor pay-per-view event. Also, a 27% growth in retransmission fees, and a higher revenue from the company’s over-the-top (OTT) subscription services (including CBS All Access and Showtime’s streaming service) led to this increase in affiliate and subscription revenues.

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The company’s overall revenue increased 3% year-over-year (y-o-y) to $3.2 billion, primarily due to growth in Cable Networks and Publishing, partially offset by declines in Entertainment and Local Media segments. In addition, CBS reported operating income of $707 million, down 2% y-o-y. The company also posted adjusted earnings of $1.11, up 6% y-o-y.

In the first nine months of 2017, the company’s free cash flow decreased 18% y-o-y to $823 million, driven by a tough comparison from the broadcast of Super Bowl 50 in 2016, and discretionary pension contributions of $100 million in Q1 2017.

Cable Networks Growth Continues In Q3

At the Cable Networks segment, the company’s revenue in the third quarter grew strongly at 40% y-o-y to $840 million, driven by the Mayweather-McGregor fight. Much of the increase at the segment was driven by a 6% y-o-y increase in affiliate revenue at Showtime. In addition, the segment’s operating income grew 3% y-o-y to $294 million, primarily due to the Showtime OTT service.

Updates On Radio Transaction

CBS launched an exchange offer to split up its Radio business as part of its agreement to merge with Entercom. According to the company, the transaction is now expected to close as soon as November 17. Entercom is divesting 13 radio stations in order to get the acquisition to go through. As a result of this exchange offer, CBS plans to retire about another $1 billion of its stock, which is in addition to the more than $1 billion already purchased (year to date), including $250 million used to buy back 3.9 million shares during the third quarter.

Future Outlook

In Q4 2017, Reuters’ compiled analyst estimates forecast revenues of $3.8 billion and earnings of $1.25 per share. At Local Media, the company expects the segment revenue to pace up to mid-single digits for the fourth quarter. At Cable Networks, scatter pricing is expected to grow in double digits against upfront pricing.

Our $67 price estimate for CBS’ stock is around 20% ahead of the current market price. We are in the process of revising our price estimate after the Q3 results.

See our complete analysis for CBS Corporation 

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