As CBS (CBS) reports its Q4 2012 results on Feb. 14, we expect improved margins and higher revenue growth compared to what the company saw in Q3. Political ad spending and growth in ad pricing will help the revenues of CBS network, CBS radio, and company-owned TV stations. In addition to this, the cable networks will continue their growth driven by subscriber growth and higher subscription pricing. CBS' stock has risen recently due to the company's announcement about converting its outdoor business in the U.S. into a real estate investment trust (REIT). We'll look forward to updates on this front. This development is important for investors as REITs invest in real estate, get special tax considerations, and offer high yields.
Political Ad Spending and Improved Pricing Will Help Revenues
For the new TV season that began in September 2012, CBS grabbed $2.7 billion in ad commitments from advertisers, implying ad pricing growth of 10% compared to 2011. While higher ad pricing will be a critical factor governing the ad revenue growth, we expect to see additional contribution from political ad spending. This will be reflected not only for CBS Network, but also for local broadcasting stations and CBS radio. Local TV stations and radio tend to perform well when advertising needs to focus on people of a particular location.
If we look at it from a long-term perspective, we feel that revenues from local TV stations and CBS radio will not experience a substantial growth. There are no major catalysts in near future and growth will be driven by the general improvement in the U.S. advertising market and CBS Radio's focus on major markets. Total ad spending in the U.S. in the first three quarters of 2012 grew by 2.5% over the same period in 2011. If we look at Q3 alone, this growth amounted to 7%, indicating that the ad market is picking up. With the auto market continuing to do well, we can expect further growth in the ad market in 2013.
However, there might be some pressure on CBS' ratings that can offset some of the ad revenue growth. The network has done well in the past, but its rival NBC has got off to a great start in the new season. This might translate into lower viewership for CBS. After three weeks of the opening of its 2012-13 broadcasting season, NBC was up 15% in ratings compared to the same period last year, while the other broadcasting networks were down by 12% to 24%. Comcast reported in January that NBC has been the No. 1 broadcasting network among the 18-49 demographic for 13 out of 15 weeks of the new season.
How Will Cable Networks Perform?
We note that CBS' cable networks business has been growing like a clockwork in the past few years. The smooth growth curve is being fueled by growth in subscribers, rising subscription fees and growth in licensing revenues. The trend will continue as the demand for premium programming exists.
CBS operates premium cable networks such as Showtime, Flix, and The Movie Channel. In addition, the company also operates Smithsonian Networks and CBS Sports Network. The premium networks are ad-free and thus rely on quality content that allows CBS to charge a high fee per subscriber. Showtime, Flix, and The Movie Channel have increased their combined subscriber base from 55 million in 2007 to 73 million in 2011. Given their premium nature, this roughly 30% growth is commendable. However, during the same period, revenues increased from about $1.16 billion to $1.62 billion, implying growth of 40%. This indicates growth in subscription pricing, content licensing as well as contribution from other networks mentioned above.
Our price estimate for CBS stands at $38.60, implying a discount of about 10% to the market price.
Disclosure: No positions.