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CBS Corporation (NYSE:CBS), the mass media company, reported solid 2013 results as the company continues to diversify away from the advertising model. Also, the company announced that it is repurchasing $2B of stock during the first quarter. The share repurchase program is increasing the returns to equity holders, which increases the valuation.

Looking forward, CBS continues to have outstanding content. The agreements with the NCAA and NFL, as well as hit shows such as The Big Bang Theory, CSI, NCIS, and 60 Minutes allow CBS to attract premium advertisements. Also, the company's hit Showtime original series, which offer somewhat more sordid content than rivals, help position the firm for solid performance during 2014.

The aggressive share repurchase programs augment returns to shareholders. Consequently, CBS could be trading at its pessimistic valuation, with its intrinsic value, $116.50, being 73% above the current share price.

Recent Developments

  1. Nina Tassler has been promoted to chairman (chairwoman) of CBS Entertainment. In this expanded role, Tassler will lead the network's Entertainment programming across primetime, daytime, and late night, as well as program development in all genres, including comedy, drama, reality, specials, and long-form.
  2. CBS is repurchasing $2B of outstanding shares during the first quarter, which includes $1.5B of its Class B common stock.

Business Summary

CBS Corporation is a mass media company that creates and distributes industry-leading content across a variety of platforms to audiences around the world. The company generates just under 60% of its total revenues from advertising; content licensing and distribution, as well as affiliate and subscription fees comprise about 40% of total revenues.

The Content Group drove total revenues growth of 8% during 2013. Within the Content Group, Entertainment revenue increased 12% and Cable Networks revenue increased 17%. The Local Group reported flat revenues Y/Y. With the Outdoor Americas segment being offered to the public, most of 2014 revenues should exclude this segment. The Entertainment segment should report solid revenues for 2014, as should Showtime Networks and CBS Sports Network.

The consolidated operating margin was flat relative to 2013. But operating profitability should improve in 2014, as the lower-margined Outdoor Americas will become unconsolidated. Management should continue to invest relatively heavily in the Showtime and CBS Sports Network brands. Showtime revenues face headwinds as hit series Dexter, Nurse Jackie, and Californication draw closer to conclusion.

The organization has ample liquidity, and the solvency position appears solid. CBS doesn't carry much cash, but the accounts receivable is substantial and is a large part of the reason why the firm had 115 days of liquidity at the end of 2013. The current ratio was 1.28. Debt-to-capital was 37%, and financial leverage was 2.62. CBS was carrying $5.56B of net debt.

The quality of earnings during 2013 was excellent. Consequently, net income shouldn't be transient. The accruals ratio using the balance sheet was 1%, and it was 2% using the cash flows statement. CBS had $15.5B of net operating assets at the end of 2013. CBS collected 98% of its total revenues in cash.

Because the CBS television network has been able to attract a large audience relative to its peers, the company has leverage with advertisers. Two examples of CBS's content that attracts large audiences are the NCAA's March Madness and the National Football League. Also, the mid-term elections this year should be accretive to revenues. Consequently, with key content still in place for 2014, CBS is positioned to have another strong year of financial performance.

Risks

  1. The share price is likely to remain volatile, and investors could lose a portion or all of their investment.
  2. Investors should judge the suitability of an investment in CBS in light of their own unique circumstances.
  3. A decline in the global economic growth rate and/or a decline in the pace of economic growth in the United States could adversely impact the results of operations and the share price.
  4. Incorrect forecasts of customer demand could adversely impact the results of operations.
  5. Higher interest rates may reduce demand for CBS's offerings and negatively impact the results of operations and the share price.

This section does not discuss all risks related to an investment in CBS.

Portfolio & Valuation

(click to enlarge)

CBS is in a bull market of primary, intermediate, and minor degree. This is a strongly trending bull market. Dips are expected to be shallow, and profit targets are at higher highs. The 50-week moving average could act similar to a trailing stop loss and/or approximate entry point.

CBS is strongly correlated with the broader market (NYSEARCA:SPY). During all of the time periods measured, the correlation was 0.99. Variations in the share price of the broader market explain almost all of the variations in the share price of CBS. Forecasts for the share price of CBS should include forecasts for the broader market.

CBS is trading above its linear trend line. The 3-month, 6-month, and 12-month price targets are $58.18, $60.92, and $66.40. In this case, the probability of a bear market of primary degree is lower than it otherwise would be because of the valuation.

Based on the fundamentals of the company, CBS is valued at $116.50 per share. The pessimistic value is $66.56. As a check on the fundamentals-based model, the free cash flow-to-the firm model has a base-case valuation of $107.50. CBS appears to be undervalued by 73%. The market may not be appreciating the strong free cash flow growth or the substantial increase in profitability. Or, the market may be pricing CBS at a discount because of its historical growth rate. The assumptions in the pessimistic model are conservative, as I assume CBS's long-term growth rate is roughly in line with GDP growth. The extremely strong rally off of the 2009 low likely reflects mispricing.

Source: CBS: Great Content, Business, And Valuation