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By Jonathan Chen

CBS Corporation (NYSE:CBS) reported third quarter earnings Thursday night that were mixed, and might have some investors questioning whether CEO Les Moonves is slipping on some fronts.

The entertainment company reported third quarter earnings of 50 cents per share on $3.37 billion in revenues. Wall Street was looking for earnings of 46 cents per share on $3.43 billion in revenues. The top line miss is a little concerning, especially since Moonves and team have been so adept at selling old content and generating new revenues from them.

"These third quarter numbers speak to the strength, stability and progress of our operations," said Leslie Moonves, President and Chief Executive Officer, CBS Corporation, in a company statement.

Once again, we turned top-line growth into strong double-digit OIBDA and EPS growth, while continuing to produce spectacular free cash flow year-to-date. Across the board, we have transformed CBS into a content company designed to perform in any environment. So far this season, the CBS Television Network is significantly outpacing the field with more programs in the top ten and top twenty in all key measures than all the other networks combined. Plus, we're adding to the Network's roster of up and coming shows with the #1 new comedy and the #1 new drama on television.

Moonves has become the king of licensing out old shows to companies like Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), generating strong margins the company and value for shareholders. He added,

[W]e continue to monetize our enormous library on new platforms, including domestic and international streaming deals signed since last quarter worth hundreds of millions of dollars. These content licensing deals are increasing the stability of our revenue base, and we are tracking ahead of our strategy to increase our mix toward more recurring, non-advertising revenue streams.

The revenue miss is one of the first in a while, but the company did partially offset this by increasing its buyback an additional $1.5 billion.

CBS will stand to benefit in 2012, as Moonves believes, "...we will increasingly benefit from online video, retransmission consent, reverse compensation from affiliates, international and local opportunities as well as political advertising that promises to be very robust."

The 2012 political climate will be incredibly intense, with Presidential, Senate, and local elections taking place. The race between President Obama and Republican candidates is already incredibly hot, and it looks as if it will only continue. Obama has already raised record amounts of fundraising, and Mitt Romney, Rick Perry, and Herman Cain are hot on his tail. A significant portion of the fundraising will go to television ads, which will be beneficial for CBS.

Still, some of the luster has been taken off CBS with the revenue miss. Deutsche Bank did lower its price target to $34 from $35, but reiterated its Buy rating. Goldman Sachs raised its price target.

J.P. Morgan was impressed with the margin expansion, saying, "We had been expecting nice margin drive (given tight cost control and new content licensing deals)—but results (+460bps) were way ahead of estimates. That reflected gains in Entertainment (+770bps), Cable (+240bps), and Publ. (+260bps)."

Moonves absolutely deserves all the adulation that he has received over the years. He has turned CBS into a powerhouse, from a company that used to cater exclusively to older demographics, one that many saw as an after-thought.

With the NFL back, advertising rates looking strong for the rest of 2011 and into 2012, and the ability to generate tremendous amounts of free cash flow from existing properties, CBS appears to offer great value here.

The shine is not coming off the "Tiffany Network" anytime soon, it just might need some polishing up.

ACTION ITEMS:

Bullish:

Traders who believe that CBS will continue to find ways to monetize its assets and generate higher ad buy rates might want to consider the following trades:

  • Go long CBS on dips and pullbacks. Moonves and his team have done a wonderful job of selling old content to distributors. There is no reason to think that the company will stop now. If the economy stays where it is, ad rates should stay stable, and CBS will benefit.

Bearish:

Traders who believe that advertising rates will weaken and Netflix and Amazon might not re-up at such high prices may consider an alternate position:

  • If ad rates start to slip, this could be a huge deflationary spiral. CBS will not be able to generate as much for its spots, and the earnings multiple could be overvalued where it currently is. The worry is also if Netflix and Amazon will continue to pay high prices for older content.
Source: The Shine Is Not Coming Off The 'Tiffany Network' Anytime Soon