Impressive is the only word to describe CBS earnings (latest conference call transcript here). It has been a long while since the company beat estimates with this much fundamental strength. While we expected strong earnings results for CBS this year and next owing to a strong network upfront selling season, we did not expect to see the fruits of a recovering in advertising market borne out so quickly. CBS crushed analysts expectations by almost 25%. Rarely does a media company produced such stunningly positive earnings comparisons.
We think CBS is going to continue to outperform for 3 reasons:
1. The company's businesses continue to benefit from gathering strength in the advertising market.
2. Consensus analyst expectations are too low and sell side analysts are going to continue to climb a wall of worry while boosting estimates throughout the year.
3. The dividend is likely to be raised again this year. We expect another increase to around $.60 per share on an annual basis.
CBS was spun out of Viacom (VIA) in 2005. The idea behind the move was to leave the faster growing assets in Viacom and to place the slower growing legacy businesses in a company that would generate cash and dividends. CBS operates in markets highly exposed to the advertising cycle: the top rated network (54% of total revenue) through CBS Television Network; CBS Television Studios; CBS Studios International; CBS Television Distribution; CBS Films; and CBS Interactive. Local broadcasting (20%) and outdoor (13%) could be the biggest beneficiary because 75% of political spending is local. CBS has 29 television stations, owned broadcast television stations; and CBS Radio owns and operates 130 radio stations in 28 markets. Outdoor consists of advertising on billboards, transit shelters, buses, rail systems (in-car, station platforms and terminals), mall kiosks, retail stores and stadium signage principally through CBS Outdoor.
Among other businesses pay cable networks (10%), primarily Showtime are especially vulnerable to the transformative change we see Netflix (NFLX) bringing to the pay television market. Publishing (6%): Simon & Schuster, is also --sadly-- in a weakened state given equally radical change in its distribution.
The results do not reflect the benefits of the upswing in advertising we can expect during a Presidential/ Olympic year. In traditional media like those businesses owned by CBS, stronger spending by advertisers should power earnings and free cash flow comparisons over the next four or five quarters. We know already that advanced purchases of television time on both traditional networks and cable networks has been up strongly. Broadcast and cable news reports a $10.2 billion upfront sales for cable networks alone. Upfront sales usually constitute between 70% and 90% of yearly revenue.
With the broadcast season start in October, comparisons will accelerate in the second half of this year and well into the next year and even into the following year if the economic recovery strengthens.
What this suggests to us is that the market for network, basic cable, spot and local television will be better than expected for another four to five quarters at least.
Consensus earnings and cash flow estimates are still therefore too low. We expect significant increases in consensus estimates (Currently $1.75 for 2011 and $2.12 for 2012) as analysts report to investors on the quarter’s results and as they begin to embrace the possibility that the ad market for television is reviving. It wouldn’t surprise us a bit if those numbers increased by 25% to 30% or more.
We also believe that CBS’s 40 cent annual dividend is likely to be boosted in the near future as well. Presumably an announcement is possible over in the fourth quarter. We expect continuing growth in the advertising market to be lead to further increases in dividend.
The quarters results were really impressive: net income for CBS Corporation jumped to $395 million (58 cents per share) vs. $150.1 million (22 cents per share) in the same quarter a year earlier. Up more than 175% from the year earlier quarter. One rarely sees this kind of operating leverage in a mature media business like CBS. When it happens investors raise the raise their sights higher. Assuming analysts raise their estimates by 25% to $2.18 and $2.75 per share respectively, then the shares are trading at under 12 and under nine times respectively. Historically the shares have traded at at median of 16.37 times with a five year high of 19 times and a low of 13 times. All in all clearly the shares are going higher.
CBS has outperformed the S&P by 40% year to date, has significant debt at $7.5 per share but in our view still has substantial upside.