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CBS (NYSE:CBS) was our top large cap media pick for 2010 and we are making it our top large cap media pick again for 2011 due to the strong margin expansion, free cash flow growth profile, and now share repurchases. The shares could increase another 65% this year to $43 based on our multiple analysis, DCF, and sum-of-the-parts valuation.

The media conglomerate is more widely known for its TV Network and TV Stations, which together only comprise slightly above a third of company revenues. CBS actually has a diverse collection of businesses including Radio stations, an outdoor advertising business, a film studio, a publishing business - Simon & Schuster, a thriving Internet business through CNET, CBSSports, and Lastfm, TV production and the resulting syndication business, and pay TV networks Showtime and CBS College Sports.

CBS is benefiting nicely from a strong rebound in advertising dollars and syndication sales tied to its top rated shows. In addition, CBS is the biggest beneficiary of 100% margin retrans and reverse retrans compensation, which could top $500 million annually in the next few years.

The radio business is performing nicely with 4Q10 revenues up 14% y/y and EBITDA margins likely expanding. Revenue growth and margin expansion should continue at that division in 2011.

At the cable networks, EBITDA margins reached a company high of 34% in 2010, and margins there should continue to expand as Showtime becomes more competitive to HBO and programming expenses continue to trend down.

CBS generated $1.45 billion in free cash flow in 2010 and free cash flow per share should grow in-line with EPS growth. Free cash could be used to aggressively repurchase shares this year given that the next debt repayment isn’t until 4Q 2012, and the company is likely to refinance that instrument between now and then, pushing out its maturity.

The shares trade at 17x 2011 consensus EPS of $1.54, which is at a discount to the three-year consensus EPS growth rate of 28%. A 28x multiple would imply a $43 price value for the shares, up 65% from where the shares currently trade. A DCF shows a value of $39 and a sum-of-the-parts analysis shows that the shares could be worth $38. Either way you value this company, the upside potential is significant.

The shares have moved up sharply in the past week due to rumors of a sale of the billboard business and share repurchases.

Management has said that they like the billboard business and would hang on to it, however, we think it is non-core and could be sold. Applying the peer group current EBITDA multiple of 11x to the Outdoor business’ 2011 consensus EBITDA of $320 million would produce a sale value of $3.5 billion, or $5 per CBS share. The proceeds from the sale could be used to pay a special $5 one-time dividend or shrink the equity by 20%. Either way, shareholders get an immediate 20% increase in the value of their CBS holdings. CBS management should go ahead and sell this business.

Source: CBS: Special $5 One-Time Dividend Likely?