CBS Advertising Recovery Accelerating

| About: CBS Corporation (CBS)

CBS reported solid results (see earning call transcript here) with EPS, revenue, and EBITDA closely matching street estimates. The report did not provide the big positive surprise seen by News Corporation (NASDAQ:NWS), with which it has a lot of overlap. This fact, plus some variances to estimates at the segment level, left investors wanting more. There was also some concern that the company did not provide detailed full year financial guidance. The stock traded down sharply after hours and in Friday morning trading but had fully recovered to a moderate gain by Friday afternoon. I think the afternoon reaction is the correct one and that CBS shares remain a great play on an advertising recovery that appears to be picking up steam.

CBS reported that advertising trends accelerated in the fourth quarter at all of its business – network TV, TV and radio stations, and billboards. This was expected though the improvement ran a bit ahead of expectations. The big news, however, is that ad trends so far in 2010 are accelerating further and running ahead of analyst estimates across the board. While this could change if the economy stutters or stumbles, for now, it appears as though analyst estimates were too low. As it turns out, on Friday many analysts raised estimates. I thought this was what I was hearing on the conference call which is why I was surprised by the afterhours decline.

CBS also provided better than expected guidance for 2010 political revenues and for the ultimate run rate on retransmission revenues (fees paid to CBS by cable and satellite companies for the right to carry their programming).

The downside in the report was higher programming expenses at the entertainment businesses (CBS, Showtime, and the new attempt to produce movies). These expenses look set to stay higher in 2010 and beyond. Also posing a challenge in 2010 will be tough comparisons in TV syndication. CBS had a big year in 2009 selling its self produced TV shows into domestic and international syndication markets. The pipeline is not bare but 2010 will see less revenue.

One other aspect of the CBS story that continues to firm up is the balance sheet. The company ended the year with almost $800 million in cash, enough to easily pay off 2009 debt maturities. Free cash flow in 2010 should match or exceed 2009's level as the TV syndication and Super Bowl cash hits the books. I suspect that CBS will refinance some debt that comes due in 2011 and beyond and then turn to a dividend increase and share repurchases later this year. This should serve as a catalyst for the stock along with what I still see as upside to earnings estimates.

Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. CBS is a long position in the Entermedia Funds. Steve Birenberg is co-owner of the Entermedia Funds management company and co-portfolio manager of the Funds.