CBS: Favorable Positioning toward New Strategic Choices -- Pivotal Research

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CBS reported 2Q17 results with revenues above expectations, but profits matching them. Commentary and data points around the company's shifting revenue mix away from advertising and towards other activities were particularly positive. With minor refinements to our model, our price target is unchanged at $67 on a YE2017 basis. We maintain our Hold rating on the stock.

For 2Q17, CBS revenue grew by +9%, well above our +4% expectation, particularly aided by content licensing fees, retransmission consent and reverse retrans fees. Growth in national TV advertising due to airings of the NCAA Final Four vs. a year-ago period without these games helped produce +6% growth in national TV advertising at the broadcast network.

Despite the revenue growth, operating income of $669mm matched our expectation and was very close to consensus, with margins of nearly 21% vs. 20% in 2Q16. The year-ago figure was $651, as OI grew by +3%. Similarly, adjusted diluted EPS from continuing operations of $0.97 also matched ours and consensus forecasts. This figure compared with the year-ago figure of $0.82. The +18% gain was aided by a -10% decline in shares outstanding.

By segment, Entertainment revenue was up by +12%, although absolute operating income was down a little and margins fell by much more, from 18% to 16%. Cable (primarily Showtime) margins were up significantly, from 42% to 44%, which resulted in $26mm in absolute profit growth (or more than all that the company generated in the quarter) as segment revenue grew by +7%. By contrast, in absolute terms publishing and local media were relatively stable year over year. Segment margins were down from 33% to 31% in Local Media, as +4% revenue growth was led by retransmission consent-related revenues, which incur network affiliation fees paid to (and recorded by) the broadcast network within the Entertainment segment. Advertising revenues at the local revenue were down by -2%.

Thematic issues were arguably the most important elements of the results and earnings call. Most notably, advertising only represented 40% of revenues in the quarter, illustrating the degree to which the company's strategic choices (i.e. sales of outdoor and radio businesses paired with a focus on subscription-related or other fee-based revenue streams) improve the company's long-term positioning given structural challenges we think exist with the advertising economy. Commentary around growth in distribution-related revenues for the broadcast network, expectations for four million All Access subscribers by the end of the year and ongoing growth in content licensing reinforce our expectations that CBS should generally be able to outperform most of its cable network-centric peers for years to come. Post these results, we continue to value CBS stock at $67 on a YE2017 basis and maintain our Hold rating.

VALUATION. We value CBS with a DCF, using a 7.3% near-term discount rate (12.1% long-term) and long-term growth of 4.0%.

RISKS to CBS include a partial dependence on public policies favoring broadcasters, the hit-driven nature of television programming, and perceptions around the "death" of TV advertising.


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