CBS: Time to Dial In

CBS (NYSE: CBS) has been on a wild ride over the past four months, swinging from $56 to $68 per share, but evidence is mounting that the broadcast giant’s stock is ready for a big bang theory of its own.

There’s a lot to like about CBS, which has the most viewers (10.7 million, on average) of all the four major broadcast networks so far in 2014, a 33% uptick from 2013.

On the financial front, the company didn’t exactly blow the competition away in its most recent quarterly results, but it did exceed analyst performance metrics. Nor does it have an overwhelming dividend story, clocking in at 0.48, for a yield of 0.80%. What CBS does have is solid business fundamentals, a loyal audience, and a steady profits trend, making the company’s stock an attractive one for the rest of 2014.

In the first quarter of 2014, CBS generated revenues of $3.86 billion, which was off by 4.5 percent compared to the same period of 2014. But there’s a good reason for that. In 2013, CBS could count on an avalanche of advertising revenue from the Super Bowl, which it could not count on in 2014 (Fox broadcast the Super Bowl this year). In 2013, CBS earned $280 million in ad revenues from its Super Bowl broadcast, and that helped inflate Q1, 2013 numbers, and quite substantially so.

If you look closer, there’s plenty of data that shows CBS has it cameras pointing in the right direction. For example:

  • CBS reports that content licensing and distribution revenues grew 6% in Q1, 2014, a rise that was fueled by an uptick in overseas licensing fees for the network’s televised content.
  • Back here in the U.S., affiliate and subscription fees from its local CBS outlets and cable affiliates rose by 9% for the quarter, suggesting continuing strong demand for CBS programming – a good sign going forward for shareholders.
  • The network also reported operating income of $818 million for the first quarter of 2014. That’s up 2% from the same period in 2013 as increases in higher-margin revenues helped compensate for the lack of a 2014 Super Bowl broadcast (but CBS doesn’t get a return trip to the Super Bowl until 2016).
  • In addition, CBS’s net earnings clocked in at $468 million for the first quarter of 2014, or $.78 per diluted share, compared with $463 million, or $.73 per diluted share, for the first quarter of 2013, pointing to another area of growth for investors.

That’s enough for leading network executives to come out and say CBS is a burgeoning success story, and that it deserves a closer look from investors.

“Thanks to the strength of our base business, as well as new opportunities to monetize our content, our momentum continues to build,” said Leslie Moonves, chief executive officer at CBS, after the Q1 numbers were released on May 8. “And we are confident we are still in the early innings of our terrific growth story.”

Moonves points to myriad areas for growth that should pump the company’s share price higher in 2014. CBS will roll out an entire new series of content franchises for its fall schedule soon, crowned by its brand new Thursday Night Football broadcast, which should rake in plenty of revenues from passionate pigskin fans.

The company also recently locked up its initial public offering on CBS Outdoor (at $28 per share), and continues to offer popular prime time network programming, with five of the six top-rated Nielsen-rated shows for the week of May 12, 2014 (NCIS, Big Bang Theory, NCIS Los Angeles, Criminal Minds, and Person of Interest.)

That’s a bigger deal than one might think, considering May is a sweeps month and is used to set advertising rates for the rest of the year. With five of the six top-ranked shows in a key sweeps period, CBS can count on heftier advertising fees for its fall schedule and for programs in early 2015.

CBS is also taking a forward looking approach to the broadcast industry, which is increasingly morphing from an advertiser-based revenue model, to a subscription-based model, as exemplified by new-age media companies like Netflix (NDSQ: NFLX) and Amazon (NSDQ: AMZN).

CBS reports its subscription fees grew by 9.2 percent for the quarter, and its content licensing and distribution business was up at a 6.4 percent clip for the same period. That’s important, as broadcast industry advertising revenues are down substantially in 2013 and 2014. CBS saw its ad revenues fall by 12.1 percent in Q1, to $2.16 billion, comprising 56 percent of total revenues.

Moonves has proven to be a visionary on that front, and recently negotiated a deal with Time-Warner that rose its per-subscriber cable fee from 75 cents to $2.00, with a growth path to $2.50 – a 333 percent hike in cable fee revenues for CBS, and its shareholders.

Moonves says that CBS is close to achieving its goal of becoming a pure content company and, at current market prices, puts the network on track to return approximately $6 billion of value to shareholders in 2014. “Looking ahead, with even stronger programming to sell to advertisers, political spending heating up later this year, and new deals coming down the pike in retransmission consent and reverse compensation, we see the back half of 2014 even stronger than the first—and we are positioned for another record year,” he said.

These are the moves winning companies make – and count CBS on that list.  So grab some popcorn and watch CBS move toward $70 per share in the second half of 2014. That’s a show you won’t want to miss.