CBS - CBS Corporation

[glorysk87]

A little surprised that there's no topic for CBS yet.  I've owned this since late last year when it dipped to the low $40's, but I think that there's still plenty of upside left in this very high-quality name.

 

The thesis is relatively simple.  CBS (and Showtime) have top-tier content which drives highly visible revenue streams and significant earnings growth. The company generates significant cash flow which is utilized for share buybacks and funding the dividend.  In addition, the company trades at a depressed valuation based on industry-wide concerns that CBS is uniquely insulated from.

 

The company’s valuation has been declining for the last few years based on widespread concerns that television viewership is in secular decline which has led to significant declines in cable subscribers.  While this is true, there are a few reasons why the valuation discount isn’t warranted in CBS’s case. First, CBS has the lowest cord cutting risk in media sector.  High concentration in one channel (CBS Network) as opposed to other media companies that have a broad group of channels means CBS doesn’t need to defend a bundle.  The CBS channel is included in every TV package, regardless of whether its 20 channels or 220 channels.  In addition, they have highly visible, long-term contracts with the MVPDs that provide a runway to a targeted $2.5B of total retransmission and reverse compensation revenue by 2020.  Finally, any cable subscriber declines that do occur are not neglecting content entirely, but rather they’re replacing their method of consumption with other services (Netflix, Hulu, etc).  This allows CBS additional channels of distribution, which replaces (or exceeds) revenue lost from television.

 

CBS is the “best of breed” when it comes to content development and distribution.  CBS Network dominates primetime ratings (#1 network among 18-49 year old viewers for 13 of last 14 years), and cord “shaving” risk is near nonexistent, considering CBS is “must have” content. MVPD’s can’t remove CBS from any of their bundles lest they face protest from their subscriber base. It is included on virtually all cable packages. Cord cutting on the other hand (meaning subscriber declines) is a risk to entire media sector, but CBS is at lower risk than rest of group.  Showtime is already a premium channel meaning cord cutting doesn’t affect it.  CBS Network has the OTT product CBS All Access which recaptures some of the subscriber declines. On the conference call last night the company stated that they already have 2mm subscribers between Showtime OTT and CBS All Access, much higher than expected with both products having been released less than a year ago.  By my calculation, this is somewhere between $200mm and $250mm of incremental high-margin revenue. Management's target of 8mm subs between the two platforms by 2020 seems very achievable, and would be ~$1B in incremental high margin revenue. This also doesn't include the ads that CBS can push through their All Access platform.

 

CBS also has a huge library of “hit shows”.  This gives them a large portfolio of owned content that is available for syndication/licensing, which offers further revenue growth.  They’re able to monetize content multiple times – domestically and internationally, linearly and digitally.  To give an example using dollar amounts:  their most recent syndication deal was to license the show “Elementary” to WGN/ION for $2.0mm per episode.  Total lump sum for all episodes came to $176mm.  In addition, CBS can pursue other syndication channels for the same television show – they subsequently licensed Elementary to Hulu Plus for $1.5mm per episode.  There’s virtually no limit to how many times CBS can “re-monetize” the same content.  They currently own over 70,000 hours of content that can be licensed many times over, in perpetuity.  The power of this content licensing can also be viewed in the recent licensing deal that CBS made with NFLX for their new Star Trek show (and the show hasn't even begun production yet).

 

Traditionally, CBS has derived a significant portion of their revenue from advertising.  This is significantly more cyclical and less predictable than affiliate revenue, and thus acts as an overhang to valuation.  However, the company has been and continues to make significant progress in transitioning a higher percentage of their revenue to recurring affiliate fee streams.  They spun off their outdoor advertising business and are planning on disposing of their radio business in order to drive this revenue split further towards recurring streams.  Shifting away from advertising revenue provides much better visibility into revenue in the future.

 

The high earnings visibility, low capital intensity and high cash flow generation allows management to return significant amounts of cash to shareholders.  Just this week a new $6B share buyback program was authorized and the dividend was raised 20%.  Interestingly, the company traded down on the day this was announced.

 

With my assumptions, I get to a stock price well into the $70s, for over 30% upside. A little crazy to me that it's down >4% today, but I think this provides a good entry.

 

Main risk in my opinion is if National Amusements decides to re-merge CBS and VIAB, which is a real possibility. While I don't think that this would happen unless the deal was definitively accretive, this is a big question mark hanging over the name currently.

[folivera13]

Great overview.

 

Can you go into more detail on your valuation assumptions that lead you to the $70 target? EBITDA or cash flow assumptions and multiples. Also based on your knowledge of management, how fast do you think they will execute the entire buyback authorization? Its a large number relative to the market cap.

 

I think a merger with VIA could end up being beneficial if Les can execute the integration.  The first thing that comes to mind is the combination of Showtime, CBS All Access, Paramount content, Viacom kids content, MTV/BET "Vice-style content", together they form a huge platform that can go OTT and can benefit from Netflix, YouTube, SnapChat, Facebook.  Viacom's main problem is their management which has tried to preserve their old business ways rather than "play offense" like Les has (reducing advertising exposure, investing in more content, going OTT).  Also if VIA and CBS combine, they can look at further M&A (LGF/STRZA, TWX).  I don't think these things are out of the realm of possibilities.

[glorysk87]

I don't have the numbers in front of me, but I based most of my numbers of management targets from the investor day and then modified them based on 3rd party research trends or my own opinions on what I thought was reasonable.  For the most part I think the company should be able to hit their targets.  Showtime OTT/CBS All Access, new international content sales, retrans/reverse comp growth - I believe in my model I came up with an add'l $3B in revenue by 2020.

 

So just to rough it out for you using quick numbers (my math may not be dead on because I'm doing this on a shitty laptop in my office's cafeteria with no materials in front of me) - $3B in add'l revenue at a 25% EBITDA margin (which is likely conservative, considering a large chunk of that incremental revenue is very high margin) gives you an additional $750mm of EBITDA.  Add that to a very conservative 2016 estimate of $3,350mm EBITDA and you get $4,100 EBITDA.  Using a 10x EV/EBITDA multiple and adjusting for net debt, then dividing by 409 shares outstanding (which uses the assumption that CBS exercises half of their authorized buyback, or $3B worth at $65 a share) gets you to a share price of $81. That's with pretty rational/conservative figures.

 

In my actual model I used even more conservative numbers, and assumed that advertising revenue fell off significantly, and that's how I got to $70.  So I see $70 as my lower scenario price target.  If you're optimistic you can get much much higher price targets.

 

In terms of the buyback - they've been repurchasing between $2 and $3B a year of stock for the past 3 or 4 years now. I don't see why that pace wouldn't continue or even increase as they generate more cash.  However, as stated above, I assumed a much slower pace of buybacks in my quick analysis above.

 

As for VIAB.  I don't necessarily think it would be a bad merger. I just think that it's a large unknown and as such acts as a significant overhang right now. If a deal is done, and the price isn't right, it could be very detrimental.

[glorysk87]

CBS is getting inexpensive again based on fears surrounding weak political spending (I did the math, even if political spending is 50% of what was anticipated, it would be a ~1.5% impact to the bottom line. So obviously I think the move is overdone).

 

I think the company is getting to an attractive entry point, and if it sinks much lower I will likely add to my position.

[hooplaer23]

My guess is that there is also still some anxiety regarding Viacom (despite Moonves saying last week that they are not in active discussions with Viacom).  It is up for debate whether that acquisition would ultimately be good for CBS shareholders, but at the very least if it does happen it changes the investment thesis.

[CorpRaider]

"Not in active discussions."

[glorysk87]

My guess is that there is also still some anxiety regarding Viacom (despite Moonves saying last week that they are not in active discussions with Viacom).  It is up for debate whether that acquisition would ultimately be good for CBS shareholders, but at the very least if it does happen it changes the investment thesis.

 

Agreed, there is likely some fear surrounding a potential merger, especially in light of the changes made at VIAB this morning which make a recombination with CBS easier than before.

 

However, I don't think that anyone at CBS (Moonves, BOD, Redstone) is willing to take on VIAB at its current price.

[glorysk87]

With some fortuitous timing Barron's ran CBS as their cover story, postulating that shares could rise 30% in the next year and double in the next three years:

 

http://www.barrons.com/articles/will-cbs-buy-viacom-1474660318

 

I'm not a huge fan of Barron's, but this article actually hits quite a few points that align with my thesis from earlier in the thread.

[ScottHall]

I feel like content media is going to still have value in the digital generation.  :)

[hooplaer23]

It looks like the wheels are being set in motion for CBS/VIA merger:

 

http://www.reuters.com/article/us-viacom-m-a-cbs-corp-idUSKCN11Y258

[glorysk87]

It looks like the wheels are being set in motion for CBS/VIA merger:

 

http://www.reuters.com/article/us-viacom-m-a-cbs-corp-idUSKCN11Y258

 

Yea. The more I think about a re-merger, the more in favor of it I am.

 

First, pretty much no matter which way you calculate a merger out, it's going to be accretive to CBS.  Second, VIAB has plenty of assets that can be sold in order to raise capital for the company to mitigate leverage. Third, VIAB has some strong brands that, with proper management (Moonves) I can see being very successful, especially in an OTT environment.

 

Interesting that the gut reaction of the market was to sell CBS and buy VIAB, and over the last few hours that dynamic has strongly shifted the other way.

 

No matter which way you cut it, I think CBS is a phenomenal investment here.

[hooplaer23]

My concern is that combining with Viacom effectively dilutes the strength of CBS's content.  A key aspect of the CBS investment case seems to be that it owns must-see video content that the company is not fully monetizing (i.e. retrans fees are low relative to viewership, inclusion in skinny-bundles or stand alone service like CBS All-Access, and licensing of content to OTT services).  In recent years, Viacom has been able to grow its affiliate fees to help offset advertising declines, but this growth has been slowing, and declining ratings and subscriber numbers should continue to make this a challenge longer term.  Obviously Viacom has several well-known brands and some of these same opportunities exist for it as well, but I don't see it on the same level as something like NFL Football or programming like NCIS or the Big Bang Theory.  Now perhaps CBS is able to acquire Viacom at a valuation that fully accounts for these challenges, but regardless, I think it does shift the investment case away from a company in a strong position with its excellent video content trading at 12x-13x earnings towards more of a turnaround story. 

[glorysk87]

My concern is that combining with Viacom effectively dilutes the strength of CBS's content.  A key aspect of the CBS investment case seems to be that it owns must-see video content that the company is not fully monetizing (i.e. retrans fees are low relative to viewership, inclusion in skinny-bundles or stand alone service like CBS All-Access, and licensing of content to OTT services).  In recent years, Viacom has been able to grow its affiliate fees to help offset advertising declines, but this growth has been slowing, and declining ratings and subscriber numbers should continue to make this a challenge longer term.  Obviously Viacom has several well-known brands and some of these same opportunities exist for it as well, but I don't see it on the same level as something like NFL Football or programming like NCIS or the Big Bang Theory.  Now perhaps CBS is able to acquire Viacom at a valuation that fully accounts for these challenges, but regardless, I think it does shift the investment case away from a company in a strong position with its excellent video content trading at 12x-13x earnings towards more of a turnaround story.

 

The way I view it is, what's the worst case scenario here?  In a worst case, they operate the VIAB properties as if they're in run-off. They don't invest into new content, they simply whore the existing content out to as many platforms as possible. They license it to the streaming guys, the put it into syndication, they sign international licensing deals, etc.  It'd be a cash cow.

 

The other option is to fully commit to reviving the properties and IP that VIAB has. Invest heavily into Comedy Centra, MTV, etc in order to revitalize their viewer base and bring them back to their former glory.

 

What's more likely is a mix of both strategies.  Moonves will likely identify the properties that he can just run-off, and use the cash generated from those to revitalize the "core" VIAB brands.

 

Now - aside from those points. I think CBS, NAI, and all their shareholders know that taking on a zombie VIAB restructuring story entails a significant amount of risk. That being the case, CBS has ALL of the negotiating leverage here, and I don't think they'll allow a merger to occur without securing incredibly favorable terms - I would imagine Moonves would demand a price that allows for solid double digit EPS accretion.

 

On top of that, there will almost certainly be huge cost synergies to be had in a merger.  Again, VIAB's in no position to demand that any assets or personnel remain untouchable, so Moonves will have free reign to slash costs as he sees fit.

 

And then finally, even if the large majority of VIAB was too far gone to restructure, CBS could slowly part the assets off and sell them. VIAB already trades at a low enough valuation that it would be unlikely that CBS would have to take large writedowns on the sale of parts of the VIAB business. So I think the downside is relatively limited.

 

I dunno. These are all massive assumptions obviously. But I just don't see too too many ways this can really hurt CBS in the long-run. The only thing that would really be bad is if the deal goes through at a significant premium to VIAB's current price.

[Jurgis]

Isn't the risk that NAI dictates terms and not Moonves? Or NAI dictates crappy strategy post merger?

[glorysk87]

Isn't the risk that NAI dictates terms and not Moonves? Or NAI dictates crappy strategy post merger?

 

I guess, but it's not really in their interest as long-term stakeholders to dictate shitty merger terms. Their best chance to build long term value, if a merger is a certain outcome, is to allow it to happen at a low valuation.

[DavidVY]

Biggest problem is who will be top dog of the merged companies.

 

One thing about media C-levels is that ego is high (think Disney) and if Moonvee feels slighted he might leave. That would be a disaster.

 

I wouldn't want Viacom leadership running the ship.

[Foreign Tuffett]

Biggest problem is who will be top dog of the merged companies.

 

One thing about media C-levels is that ego is high (think Disney) and if Moonvee feels slighted he might leave. That would be a disaster.

 

I wouldn't want Viacom leadership running the ship.

 

What Viacom leadership? They don't even have a permanent CEO right now.

[glorysk87]

Biggest problem is who will be top dog of the merged companies.

 

One thing about media C-levels is that ego is high (think Disney) and if Moonvee feels slighted he might leave. That would be a disaster.

 

I wouldn't want Viacom leadership running the ship.

 

There's near-zero percent chance that anyone but Moonves runs the show. I don't see this as a problem in the slightest.

[Spekulatius]

Biggest problem is who will be top dog of the merged companies.

 

One thing about media C-levels is that ego is high (think Disney) and if Moonvee feels slighted he might leave. That would be a disaster.

 

I wouldn't want Viacom leadership running the ship.

 

There's near-zero percent chance that anyone but Moonves runs the show. I don't see this as a problem in the slightest.

 

I agree. letting the mediocre (at best) management at VIA run the post merger CBS/VIA entity and letting Moonves go does not make any sense. The whole idea of this merger is to boost management and improve the media properties that are in decline at VIA.

 

It is ironic that VIA was supposed to own the great assets during the spinoff from CBS, while CBS was the nature cash cow business with questionable outlook. THe fortunes made a 100% turn and this is in good part due to Moonves stewardship.

[DavidVY]

I've stopped attributing rationality to corporations. Personally i believe its about political power and insider perks first then profits and shareholders second.

[muscleman]

The earnings have been stagnant for the past 7 years. The only time when the earnings jumped from 2010 to 2011 was due to operating expense reductions. Why do you like this company at 10x EV/EBITDA?

[ScottHall]

I've stopped attributing rationality to corporations. Personally i believe its about political power and insider perks first then profits and shareholders second.

[glorysk87]

The earnings have been stagnant for the past 7 years. The only time when the earnings jumped from 2010 to 2011 was due to operating expense reductions. Why do you like this company at 10x EV/EBITDA?

 

Where are you getting your numbers?

 

EPS has gone from $1.61 in '08 to $3.31 in '15 for a CAGR of ~10%.

 

See attached graph for EPS trend.

[muscleman]

The earnings have been stagnant for the past 7 years. The only time when the earnings jumped from 2010 to 2011 was due to operating expense reductions. Why do you like this company at 10x EV/EBITDA?

 

Where are you getting your numbers?

 

EPS has gone from $1.61 in '08 to $3.31 in '15 for a CAGR of ~10%.

 

See attached graph for EPS trend.

 

I went through the 10-Ks starting from 09, excluded the one time items, and found the overall profitability to be stagnant.

They kept buying back stocks through more loans and FCF, so that helps to grow EPS.

 

If the company trades at 16x PE, I want to see it growing earnings at 15% a year. Then if it buys back stocks, the EPS growth can easily go to 20%+.

For a stagnant company, buying back stocks is the only way to prop up EPS, but it is limited.

 

 

 

 

[glorysk87]

Don't really know what to say. I think you did your math wrong.