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You Should Take a Closer Look at CBS Corporation
Posted by: James Miller Phd (IP Logged)
Date: April 25, 2014 10:15PM
CBS Corporation (CBS) is a mass media company. The company operates in the following segments: entertainment segment (55% of 2013 revenue) consists of the CBS Television Network, CBS Television Studios and CBS Global Distribution Group, CBS Films, and CBS Interactive; Cable Networks (11%), which is composed of Showtime Networks, CBS Sports Network, and Smithsonian Networks; Publishing (5%), which consists of Simon & Schuster; Local Broadcasting (18%), which is composed of CBS Television Stations and CBS Radio; and Outdoor Americas (9%), which provides advertising space on various structures, including billboards, transit shelters and benches, buses, rail systems, mall kiosks, stadium signage, and in retail stores.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment opportunity.
Long-Term Growth Driver
CBS plans to increase the non-advertising dependent revenue streams (e.g., local TV station retransmission consent revenues) and emerging digital distribution platforms such as Netflix, Amazon and Hulu. The company focuses on increasing subscription based revenue channels. Also, the company expects Subscription video on demand (SVOD) revenues to increase. Moreover, it targets about $2 billion per year in retransmission revenues and reverse compensation by 2020. Currently, it expects retransmission fees to reach $1 billion by 2017.
Apart from the Netflix and Hulu´s deal, the company entered into a deal with Amazon that extends the latter´s archive of television shows and films currently available on its streaming video site, Amazon Prime Instant Video. Further, the deal with Turner Broadcasting for television and Internet rights to the immensely popular NCAA college basketball tournament. Finally, it also extended its broadcast rights deal with the National Football League (NFL) until 2022.
Returning value to shareholders is a top priority at CBS. It announced an accelerated share repurchase program (“ASR”) of $1.5 billion of its Class B common stock during the first quarter of 2014. It expects to buyback $2 billion worth of share repurchases, with remaining $500 million coming from the existing share repurchase authorization. Since the implementation of the share repurchase plan in Jan 2011, the company has bought back $4.39 billion worth of shares, demonstrating a good commitment.
The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, which is very similar to the one projected for the S&P 500. For investors looking for a better Zacks Rank, The Walt Disney Company (DIS) has a Buy Rank.
Relative Valuation, Earnings and ROE
In terms of valuation, the company sells at a trailing P/E of 20.8x, trading at a discount compared to the industry mean. Earnings per share (EPS) have increased by 22.6% in the most recent quarter compared to the same quarter one year ago. This year, Wall Street expects an improvement in earnings ($3.48 versus $3.01).
In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance and EPS showed an interesting upward trend in the last five years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of weakness within the company.
Let´s compare the current ratio with the peer group in the next table:
CBS Corporation has a very good current ratio of 15.41% which is higher than the ones registered by Walt Disney Co and Time Warner Inc. (TWX). For investors looking for a higher ratio, Liberty Media Corporation (LMCA) could be the option.
As outlined in this article, we believe that the company´s long-term agreements will generate positive cash flow in the long run. Also, the plan to increase the non-advertising dependent revenue streams as well as the intention to increase subscription video on demand (SVOD) and the retransmission revenues are solid catalyst for the upcoming future.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like David Tepper (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Eric Mindich (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) have taken long positions on it.
Disclosure: James Miller holds no position in any stocks mentioned.
Guru Discussed: David Tepper: Current Portfolio, Stock Picks
Eric Mindich: Current Portfolio, Stock Picks
Stocks Discussed: CBS, DIS, TWX, LMCA,