CBS Stands to Benefit if Radio Ad Market Improves in 2010

Apr.16.10 | About: CBS Corporation (CBS)

CBS’ (NYSE:CBS) radio business has seen steady declines in advertising revenues over the past few years. We estimate that radio business constitutes 13% of the $9.22 Trefis price estimate for CBS’ stock. In comparison, other media companies like Disney (NYSE:DIS), Time Warner (NYSE:TWX) and Viacom (NYSE:VIA) have little or no presence in the radio market.

BIA/Kelsey, a financial and strategic adviser to media companies, estimates that the radio ad market will begin to slowly recover in 2010. We estimate that there could be an 8% upside to our $9.22 Trefis price estimate for CBS’ stock if the radio ad market were to grow instead of decline as we forecast.

CBS’ Radio Ad Revenue Declines

The majority of historical ad revenue declines for CBS’ radio business can be attributed to 1) CBS’ strategy of divesting some of its radio stations and focusing on the biggest and most profitable markets, and 2) declining radio advertisement market.

Trefis Forecasts Radio Ad Market Declines

We currently forecast a decline in the broader US ad market (TV, cable, radio, newspapers, outdoor) in 2010 and a slow recovery starting in 2011.

We estimate that radio’s market share in the total advertising market will decline from about 6% in 2009 to about 4.5% by the end of Trefis forecast period. This implies overall radio market ad revenues declining from about $15 billion in 2010 to about $13 billion by the end of our forecast period.

Potential for Ad Market Recovery

Unlike our declining radio ad market forecast, BIA/Kelsey expects that the radio ad market will grow by 1.5% in 2010 and growth rates will range from 2% to 4% in subsequent years. Below are the factors that are expected to drive radio market recovery, though at a slow pace:

1. Businesses increasingly using radio for local advertising

Telecom and insurance businesses as well as new online businesses are expected to use radio for advertising, as radio is considered to have a higher reach and a greater impact on its target audience at a local level, compared to regional and national level media like TV for advertising.

2. 2010 elections will benefit radio ad revenue growth

Although TV ad slots generally receive a much larger share of political ad campaigns, radio will benefit from political advertising associated with 2010 mid-term elections in the US.

8% Upside to CBS’ Stock Based on BIA/Kelsey’s Forecasts

In comparison to our estimates, BIA/Kelsey’s forecasts could result in 0.5% to 1% growth in the broader US ad market in 2010, with radio gaining a very small (less than 0.1%) share. Furthermore, the share of radio in total US ad market would be flat over our forecast period while the overall US ad market grows by 2% to 4% each year.

You can modify our forecasts above to see how a change in the the US ad market and flat radio market share could add more than 70 cents per share (about 8%) to our estimate for CBS’ stock.

Disclosure: No positions