CBS: Eying Stability Into 2016

We are confident in our CBS estimates, both for 4Q (we expect EPS of $0.91) and 2016. Underpinned by healthy TV ad demand continuing into 1Q16, we believe 4Q and 1Q results are unlikely to realize material downward earnings revisions – a welcomed departure. This indeed could be an unusual time when media investors look for TV ad exposure (~50% of CBS revenue) as opposed to pay-TV affiliate fee exposure. Upcoming drivers include the Super Bowl in 1Q, political ad contributions and possible rationalization of Thursday Night Football (TNF) rights fees. We believe 2016 content licensing revenue will be broadly stable YoY, the buyback pace remains steady and significant, and valuation at 11.5x ’16E EPS of $4.00 is reasonably attractive, in our opinion.

*Ad market trends and favorable comps make CBS EPS revisions less likely this year. Favorable TV industry ad market trends (SMI reported 12% and 15% domestic broadcasting ad spend growth in October and November) increase our conviction in our 5% YoY estimate for 4Q15 network ad growth, particularly given the modest 1% decline in ratings QTD (well ahead of its peers). These trends, along with the favorable YoY TNF scheduling compare (with one additional game in 4Q), lower the risk of material earnings revisions heading into 4Q. This is a positive second-derivative change, as EPS revisions averaged -8% in the two months leading up to earnings over the last six quarters.

*Swing factors favorable for CBS in 2016. In prior years, CBS faced greater headwinds from the new TNF contract (2014) and very difficult TV licensing comparisons (2015). For 2016 we do not see any such new major headwinds. Given the ad market, we are confident in our 3% YoY underlying network ad growth outlook for 2016. Our estimates for Super Bowl and political advertising are incremental to that outlook. We model flat YoY licensing revenue given the younger slate of current primetime shows (which could drive a rebound in licensing revenue growth in 2017).

*TNF could become a source of bottom line pick-up. Our model assumes CBS retains the rights to the TNF package, at a modest uptick in costs. We note that if CBS does not retain the rights, there would be downside to our 2016 ad growth assumption, but there would be an offsetting margin impact, with a net-positive $100-120m OI impact (our estimate); of course, CBS would lose the Thursday Night NFL promotional platform.

*Valuation multiple attractive on many counts. CBS currently trades at 11.5x ’16E EPS, well below the group average of 16x, the cheapest media name besides VIAB and SNI; it trades below its three-year average of 14x. Our $60 TP implies a 15x ’16E PE, below the current peer average of 16x.

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CBS Corporation - Eying Stability into 2016

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