Popular wisdom, it seems, is wrong in the case of CBS Corporation (NYSE:CBS). The popular belief is that broadcasters, like CBS, which operate broadcast TV and radio networks, won't be able to compete with streaming video services such as Netflix Inc. (NASDAQ:NFLX) and digital radio services such as Pandora Media Inc. (NYSE:P) and Apple Inc.'s (NASDAQ:AAPL) iTunes Radio.
Yes, more of us are getting our music and our entertainment from digital services, but CBS's finances prove that broadcast radio and TV are still viable businesses. The numbers prove that CBS is still making money and delivering for investors in a digital world.
How CBS Delivers for Investors
Even though it is old fashioned, CBS still managed to give shareholders a diluted quarterly year-to-year earnings per share (EPS) growth rate of 16.92%. That's far better than Pandora, which still hasn't delivered any EPS growth. The old fashioned model of selling advertising on TV and radio broadcasts still makes money for investors.
The amount of money CBS makes from its business model is also large. The network had revenues of $14.43 billion on June 30, 2013, and a free cash flow of $415 million on the same day. In contrast, Netflix had a negative free cash flow of -$9.36 million on the same day and revenues of just $3.94 billion.
These numbers indicate that CBS is a bargain when compared to Netflix. On August 20, 2013, CBS was trading at $51.87 a share. Netflix was trading at $286.01 a share. Despite its share price, Netflix isn't making any money or doing anything for shareholders.
Netflix doesn't seem to be panning out, but what about Pandora? Pandora reported revenues of $457.14 million and a free cash flow of just $6.76 million on March 31, 2013. Pandora is making some money; Netflix is not making any money.
CBS Still Has a Large Audience
The digital challenge is not hurting CBS as much as people think. We have to ask - Why is CBS still making money in today's world? The answer is that CBS still has a large potential audience for its programs outside the web. There is still a vast pool of unconnected customers in the United States that CBS can tap.
Statistics show that around 20% of American households, or one in five homes, in the USA does not have an Internet connection of any sort. (conflicting information) That's a pretty large audience for CBS's programs. It also indicates there are large numbers of Americans that cannot access streaming video or digital radio in their homes. They have to rely on over the air broadcasts, satellite, or cable TV.
Around 90% of American households pay for cable or satellite TV, but that number is falling. The Convergence Consulting Group estimated that around 4.7 million Americans will stop subscribing to satellite or cable television service this year. That's up from 3.74 million last year. So CBS's potential audience for its broadcasts might actually be growing.
Obviously, a large percentage of those people will be watching DVDs or streaming video instead of cable. Yet they still want to get their news from somewhere and to watch sports, which will be available through CBS's broadcast stations.
CBS Profits from Digital
CBS can also cash in on streaming video by creating programs that can be marketed through such digital outlets. An example of this is its recent miniseries, Under the Dome, which is being shown on the broadcast network and marketed through services like Netflix and Amazon at the same time. CBS has the capability to cash in on both broadcast and digital.
Lower End Customers and Growing Revenues
There is a serious downside to CBS's business model. It is targeting customers that have less money and less appeal to advertisers. The Huffington Post reported that 99% of American households with an income of over $150,000 had Internet access while around 57% of households making $15,000 a year or less lacked Internet access.
That means CBS's customers do tend to be poorer and older and less attractive to advertisers. CBS should be a tougher sell to advertisers, yet its revenue tells a different story. CBS's revenue increased by nearly $1 billion between June 2012 and June 2013; the network reported revenues of $13.67 billion in June 2012 and $14.43 billion in June 2014.
CBS proves that broadcasters can compete and make money in a digital world. Unfortunately, the market doesn't seem to be paying attention.
Based on the above analysis, it is safe to assume that CBS can be bought for medium term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.