CBS delivered another outstanding quarter. Led by Les Moonves, CEO and president, CBS continues to put in by far the best performance of any media company.
CBS reported EPS of 58 cents, well in excess of the 45 cents consensus. Revenues were just a bit ahead of expectations at $3.59 billion vs. consensus of $3.55 billion. EBITDA of $873 million was $110 million ahead of consensus as once again margin performance was outstanding. EBITDA margins of 24% are way ahead of even the most aggressive analyst estimates.
$100 million of the $110 million EBITDA beat came from the entertainment segment. Upside from the domestic Netflix (NASDAQ:NFLX) deal likely accounted for a lot of the gain. Analysts and investors will surely fret that this is one-time but, as Moonves noted, deals recently announced with Netflix abroad and Amazon (NASDAQ:AMZN) in the US are not in the 2Q numbers.
Strength was also seen by Showtime leading the cable networks segment to beat EBITDA expectations by over 9%. Local broadcasting assets performed in line with expectations which is not bad at all given very tough comps in political and a lull in auto ads due to the crisis in Japan. Only outdoor fell a bit short of expectations.
CBS is benefiting from the fact that it needs to replace DVD sales revenue. Instead, as it leads the industry in selling content to Netflix and other online video distributors, all of the upside is incremental revenue at extremely high margins.
Investors will worry that advertising will falter along with the economy. I think CBS has some defense against this line of thinking, given a just completed very strong upfront and a big 2012 with political and Olympics tightening the market.
CBS has generally traded at a discount to other entertainment stocks due its heavy reliance on advertising. Under Moonves, the company is performing beautifully on advertising while diversifying into content and subscription fees. Both the new areas have more upside.
Superb execution, strict cost controls, diversification from advertising, and aggressive return of cash to shareholders warrants multiple. Positive business momentum and these factors provide protection against economic concerns. In a decent market, CBS can trade to the mid-$30s. It remains my top pick in media and communications.
Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CBS is a net long position in the Entermedia Funds, long/short equity hedge funds focused on media, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in the Funds' investment management company, and has personal monies invested in the Funds.