After watching Citi (C) downgrade the media sector to neutral yesterday, I thought it appropriate to step in and present a differentiated view on one of the stars of the group, CBS Corp. (CBS). Legendary Chairman Sumner Redstone and the exceptional President/CEO Les Moonves have done a great job turning CBS into a free cash flow machine, with a high quality programming line-up and diversity across the top-line to create a balanced, long-term core holding in the media sector.
Let's consider the following:
- Let's talk about the cash flow. CBS generated $1.5 billion of FCF in both 2010 and 2011, and used that cash to retire $1.1 billion in debt (2010), $1.0 billion in common stock (2011) and an increase in the common dividend (to $0.40/share annually from $0.20/share). One thing I love about the CBS business is the lack of capital intensity (capital expenditures run in the $250.0 mm to $300.0 mm context) and thus, the ability to de-leverage and return cash to shareholders (repurchases and dividends) at a consistent rate. Absent the US heading into recession in 2012, advertising spending should be up relative to 2011 (higher business confidence, sounder economic footing), which will lead to stronger FCF in 2012 and a build on the company's $660.0 mm cash pile as of the year-end.
- CBS has top quality programming. Check the weekly Nielson ratings, and CBS owns 50% of the top 10 every week. CBS boasts the NCIS franchise, the CSI franchise, 60 Minutes, Criminal Minds, The Good Wife, How I Met Your Mother, Two and a Half Men, and Rules of Engagement. In addition, the network just scored on the Masters, the NCAA Basketball Final Four and broadcasts the NFL (the best rated of the professional sports). Consistently good programming supports the underpinning of revenue growth for a network, and CBS is the top positioned of the major networks.
- The revenue stream is not just advertising, and moved a bit further away in 2011 (providing somewhat of an economic buffer). Advertising revenues accounted for 63.2% of total revenues in 2011, down from 65.1% in 2010. The shift: more from the Content licensing and distribution group (up to 22.8% from 21.8%) and the Affiliate and subscription fees group (up to 12.2% from 11.3%). Let's be clear: the story is still driven by ad revenues. But any shift toward content and licensing is a good thing for the long-term stability of the business.
- The company breaks out OIBDA into two segments: Content (Entertainment, Cable Networks and Publishing) and Local (Local Broadcasting and Outdoor). Content had a great 2011 (OIBDA up to $2.2 billion in 2012 from $1.5 billion in 2011), and the company is positioned for a strong 2012 (as the "content" remains highly rated and well positioned). Local is very stable, and thus, a nice baseline of $1.1-$1.2 billion of OIBDA for the CBS business.
- The stock isn't particularly expensive considering the cash flow, low capital intensity and strength of the franchise, at 13.8x 2012 and 12.0x 2013 (a slight premium to peers and a marginal premium to the broad market considering the aforementioned). CBS has growth embedded into the EBITDA ($9.6 billion actual in 2011, $11.0 billion in 2012 and $12.1 billion in 2013) that isn't being purchased for an exaggerated premium.
I could say more, but have made my point, which should hopefully lead you, the reader, to take a look at CBS and see if the value here presents an opportunity for your portfolio.
Disclosure: I am long CBS.