Investors in CBS (NYSE:CBS) were very pleased with the second quarter earnings report. Even as sales were down more than anticipated, strong cost control and share repurchases allows for flat earnings per share.
With several drivers coming up pushing momentum in the coming two quarters, investors liked the results amidst continued merger & acquisition interest within the industry.
I like the shares but require a bit more margin of safety before the risk/reward opportunity becomes appealing enough in my eyes.
Second Quarter Highlights
Last week, CBS released its second quarter results as it reported revenues of $3.19 billion, down 5.4% compared to last year. Analysts were looking for a slightly less steep fall in topline sales, anticipating revenues of $3.24 billion for the three months period.
The fall in topline sales hurt bottom line earnings as well. Reported net earnings fell by 7.0% to $439 million. Yet sizable share repurchase programs executed over the past year allowed for diluted earnings to come in unchanged at $0.76 per share.
Adjusted earnings came in at $0.78 cents per share which was a three cent improvement from last year. Earnings furthermore came in ahead of consensus estimates at $0.72 per share.
Looking Into The Operational Performance
In terms of business units, it was notably the main entertainment business which displayed a weak performance. Reported revenues at the main entertainment business were down by 8.6% to $1.83 billion. Sales were down on lower advertising revenues and the absence of the NCAA Tournament semi-finals. Operating earnings dropped by 12.8% to $341 million on the back of lower sales and increased television programming costs. Of course the World Cup had a big impact with many viewers switching for Walt Disney's (NYSE:DIS) ESPN amidst the increased popularity of the game.
Cable network revenues were essentially unchanged at $516 million, down 0.4% compared to last year. Lower licensing revenues related to international sales were partially offset by higher rates for Showtime Networks, CBS Sports and Smithsonian Networks. Despite the modest fall in topline sales, the unit remains incredibly profitable, posting operating earnings of $213 million, a 5.4% increase compared to last year.
Revenues from local broadcasting fell by 4.7% to $665 million on the back of the non-renewal of sport programming contracts and the absence of the NCAA Tournament semi-final. Operating earnings dropped by 8.1% to $215 million.
Publishing sales rose by 11.6% to $211 million, driven by the continued growth in digital books. Operating earnings improved modestly to $23 million.
At the end of the quarter, CBS held roughly $261 million in cash and equivalents. With $6.2 billion in total debt, the company's net debt position for the end of the quarter was about $6 billion.
With some 581 million shares outstanding, and shares trading at around $59 per share, equity in the business is valued at little over $34 billion.
On a trailing basis, CBS has now posted sales just shy of $15 billion on which it has posted net earnings just below $1.9 billion. Given the current equity valuation, shares are valued at 2.3 times annual sales and 17-18 times annual earnings.
Long Term Stagnation, More Focused Future?
CBS has failed to grow its revenues over the past decade, currently posting annual sales just below $15 billion, as topline sales have come in between roughly $13-$15 billion each year between 2004 at the current moment.
Earnings have been very volatile, as CBS reported a massive $11.7 billion loss for the crisis year of 2008. These losses were the result of large impairment losses. The company has been profitable ever since, steadily increasing earnings to a current trailing run rate of about $1.9 billion.
To compensate for the lack of topline sales growth, CBS has managed to grow operations on a per share basis, repurchasing a cumulative third of its outstanding share base over the past decade.
CBS continues to focus on its premium programming, streamlining operations and returning cash to investors. During the quarter, CBS repurchased $411 million worth of stock, retiring shares at a rate of nearly 5% per annum. These share repurchases are complemented by a relative modest 1% dividend yield. More repurchases are to be expected with the share repurchase authorization being doubled to $6 billion, sufficient to retire roughly one in every six shares outstanding.
On top of that the company is streamlining its operations after having spun off CBS Outdoor Americas (CBSO) through a recent public offering, followed by a complete split off. This reduces the company's reliance on volatile advertising markets.
Besides the current operational issues and the spin-off of CBS Outdoor, many outside issues had a big impact on the industry. This includes the court ruling against Aereo which is a beneficial ruling for content providers like CBS.
The biggest elephant in the room of course was the so far failed attempt of Twenty-First Century Fox (NASDAQ:FOX) to acquire Time Warner (NYSE:TWX) which could create lot of changes in the industry. CBS's executives did admit that if a deal were to occur, CBS might be interested in news network channel CNN which undoubtedly had to be divested for antitrust reasons.
For the near term, the company is more confident towards the future. Revenues, which have been under pressure on both structural and cyclical issues, are anticipated to recover in the second half of the year. Higher political spending with the mid-term election coming up are a driver, as well as Thursday Night Football. Furthermore the advertising market is anticipated to show further improvements during the current quarters, with this recovery anticipated to accelerate into the final quarter.
While these developments are nice for the near term future, shares already trade at 17-18 times earnings, an equivalent multiple to the market. While overall sales growth has been limited, the pace and structural nature of share repurchases is attractive. Even so, I would like to see CBS focusing a bit more on growing its operations, notably in content creation.
I like the anticipated improvements in the near term and the appealing long term royalties from being a premium content producer. Yet the company has some real challenges to report more structural growth. As such I would like to see a slight discount to the general market before finding a bit more appeal. A 15 times earnings multiple, based on earnings of $1.9-$2.0 billion translates into a $50 price target, a level at which I will be a buyer.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.