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CBS is moving aggressively to adapt in a fast changing industry landscape.

Focuses on core business after the IPO of CBS Outdoor.

Despite these moves and a recent sell-off, shares are a bit too expensive to my taste.

Investors in CBS (NYSE:CBS) have seen a meaningful pullback in the value of their holdings over the past few months. Despite the pullback and the solid strategic direction, the valuation is still not appealing enough for my standards.

I will keep the company on my radar being a buyer on further correction ahead of a solid second half of this year.

First Quarter Headlines

Last week, CBS released its first quarter results. Reported revenues came in at $3.86 billion, down 4.5% compared to last year. The fall in revenues came on the back of $280 million in revenues being generated from the Super Bowl XLVII last year which this year was broadcasted by Fox.

Earnings from continuing operations came in at $468 million, up five million compared to last year. Earnings came in at $0.78 per share, up five cents compared to last year on the back of sizable share repurchases.

Operational Review

The decline in revenues was the result of weakness at the content group and within that segment the entertainment group in particular as revenues fell by 9.3% to $2.30 billion. As discussed this was largely the result of the Super Bowl XLVII shifting to Fox and fewer basketball games.

Cable network revenues rose nicely by 12.3% to $537 million on the back of higher Showtime license revenues as publishing remained under pressure thanks to difficult comparables.

As is well known the business model of giant media companies is changing rapidly. Advertising revenues fell by 12.1% to $2.16 billion but still makes up 56% of total revenues.

While traditional advertising proceeds are under pressure CBS is generating more revenues through content licensing and distribution revenues which rose by 6.4% to $1.07 billion. Affiliate and subscription fees rose by 9.2% to 567 million.

CBS is pro-active in reducing its reliance upon advertising revenues, seeing the transformation taking place in the industry with the emergence of Internet-based TV offered through (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). The company has even set an official goal to reduce advertising revenues to less than 50% of total revenues.

CBS Outdoor

During the quarter, CBS Outdoor (CBSO) completed its IPO at an offering price of $28.00 per share. CBS still owns a 81% stake following the public offering which it aims to divest in a tax-free split later this year.

Of course the planning of the divestment is subject to market conditions as well as regulatory approval. CBS Outdoor trades at around $32 per share following the successful public offering, commencing a roughly $4.0 billion market valuation. The remainder of the stake of CBS is therefore valued around $3.2 billion.

During the first quarter CBS Outdoor reported $288 million in revenues and operating income of $28 million.


CBS ended the quarter with $311 million in cash and equivalents and $5.95 billion in debt, resulting in a net debt position of roughly $5.6 billion. CBS furthermore holds $1.60 billion in debt related to CBS Outdoor.

Trading around $57 per share, CBS is valued around $32.8 billion. This values equity in the firm at roughly 2.1 times annual revenues of $15.3 billion for the past year. The company is valued at 18 times earnings of close to $1.9 billion.

CBS has retired its shares at an aggressive pace in the first quarter, repurchasing roughly $2.0 billion worth of its shares. Even after these large repurchases, the company still has about $3.3 billion in repurchases being authorized.

Takeaway For Investors

CBS is taking steps which shareholders tend to like. It has IPOd the Outdoor business which is no core business at a nice price, while focusing its attention on diversifying revenue streams and returning cash to investors. To illustrate, CBS Outdoor generated just 3.4% of operating income in the first quarter.

CBS is typically strong in drama and comedy content and continued success in programming is required to keep advertising revenues stable. Attractive shows are also necessary to attract licensing fees from internet-based competitors like Netflix which are creating their own content at the moment as well. CBS is actually quite confident about the second half of the year with stronger programming and political spending expected to increase.

I believe that the focus on the core business together with a shareholder friendly strategy is welcomed by investors. Despite these moves shares have actually fallen from $67 to $57 over the past couple of months.

The valuation is still rather steep at 18 times last year's earnings in my opinion. While the multiple might come down this year, I am still finding shares a bit too expensive for my standards, but welcome the strategic moves made by the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.