Better Ad Pricing Boosts CBS

Dec. 3.10 | About: CBS Corporation (CBS)

CBS Network’s pricing for its advertisement slots declined in recent years, especially in 2008 and 2009. CBS traditionally competes with media conglomerates like Disney (NYSE:DIS), News Corp (NASDAQ:NWS) and Time Warner (NYSE:TWX) in the broadcasting and cable networks businesses.

We estimate that CBS Network’s ad pricing declined from $3.87 in 2007 to about $3.25 in 2009 due to a weakened economy and a decline in viewership. However, if prices return to near 2007 levels, which seems highly achievable, this could add around 5% to our price estimate.

Given the encouraging retail and consumer data recently, will a favorable advertising environment result allow CBS to improve its pricing? We think it’s possible and could add around 5% to our price estimate of $19.72, which is around 12% ahead of the current market price.

Demographic Trends Challenge Networks

We currently forecast more or less stable pricing as there is a possibility that CBS may continue to face pressure concerning its audience as cable networks continue to penetrate into the U.S. demographics.

According to an article published on Herald Tribune, the median age for viewers at broadcasting networks including CBS stands at around 51 [1]. The article also states that the audience for broadcasting networks has aged at twice the rate of the general population during the past two decades [1]. As advertisers typically target younger audiences, this trend is forcing broadcast companies like ABC, Fox, NBC and CBS to shift strategies and think more about older viewers as they try to maintain advertising revenues.

+5% on Improved Pricing

If CBS can convince advertisers that the older generation is an attractive market to target as well given higher disposable incomes and greater potential for purchasing consumer goods like iPads, smartphones and other popular items that younger generations might already own, then it could see a rebound in pricing trends. In a recent article, we cited an AT&T executive who mentioned that the older demographic represents a large untapped opportunity for data revenues. (See Verizon, Sprint, AT&T Benefit From Older Data Users, Social Networking.)

This combined with a slowly recovering ad spending environment, CBS is starting to see an improvement in pricing. The company stated in its recent earnings call that it has benefited from improved upfront advertising and scatter pricing in 2010. Upfront advertising is when advertisers buy their advertising time at the start of a season or a set advertising sales period. Scatter pricing is when advertisers buy time during a season or based on specific targets or events.

If this trend continues, overall CBS ad pricing can increase more than we forecast. If the figure reaches 2007 levels of close to $3.90 by end of our forecast period, there can be a mild 3% upside to our price estimate for CBS’ stock. As pricing and increasing viewership have a positive correlation, we expect that better viewership could add another 2% to 3%.

Below you can see how change in ad pricing and viewership can impact CBS’ stock.

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Disclosure: No position