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While many investors might assume that a television network, especially the most-watched TV network in the United States, would be highly susceptible to the cyclical nature of advertising, that is not the case for CBS any longer.
“CBS fundamentals are less exposed to cyclical advertising revenue than many investors assume,” Barclays analyst Anthony DiClemente wrote in a research note on November 5. “We are willing to pay a higher multiple than we would have paid for CBS a few years ago when the business was more cyclical.” DiClemente has predicted that the company’s stock will outperform the industry over the next year.
For the three month period, the company’s earnings rose 16 percent, even as advertising sales declined, proving that the company is no longer as dependent on advertising as it has been in previous years. Advertising sales fell 3.1 percent in the third quarter to $1.93 billion, despite the large number of election-related advertisements that ran in the past few months. The record spending in national and local elections did boost profit at CBS’s local TV and radio stations.
The drop in advertising revenue is not unique to CBS. According to the Wall Street Journal, the “overall ad climate this year has been lackluster.” However, News Corp (NASDAQ:NWS) reported on Tuesday that its advertising sales at its U.S. cable networks rose 8 percent, an increase greater than either Comcast (NASDAQ:CMCSA) and Discovery Communications (NASDAQ:DISCA) posted.
As CBS has diversified its sources of revenue, other segments have become more profitable. In particular, content-and-licensing revenue increased by 7.9 percent over the quarter and affiliate and subscription fees grew 12 percent year-over-year.
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In the third quarter, the company’s earnings beat analysts expectations; profit increased to $391 million, or 60 cents per share, up from $338 million, or 50 cents per share, in the year-ago quarter. Revenue and operating margin also increased, rising 1.6 percent and 22.6 percent, respectively.
CBS has beat analysts expectations for the past four quarters. In the second quarter, it beat forecasts by 7 cents. Ahead of the earnings report 17 analysts held a buy rating on the stock, 7 rated it a hold, and none rated it a sell, indicating a bullish stance by analysts.
Shares rose 1.5 percent to $34.52 in aftermarket trading on Wednesday, just four dollars shy of its 52-week high of $38.32.
In the company’s earnings conference call, Chief Executive Officer Les Moonves said CBS had made great improvements over the past quarter, citing three major retransmission consent agreements, an important reverse compensation deal, and new international and domestic streaming contracts. Reverse compensation refers to the practice where a commercial station pays a network to be affiliated with that network.
According to Seeking Alpha, the $1 billion in retransmission fees the company expects to generate per year “underscores the transformation of broadcast networks into content producing-distributing juggernauts fueled by multiple screens revenues.” Three years ago, retransmission fees and reverse compensation, fees were virtually non-existent.
CBS has grown significantly since it was spun off from Viacom (NASDAQ:VIAB) in 2005. Even with the 5 percent erosion at broadcast networks, retransmission fees have changed the landscape of broadcast content economies, including that of CBS. However, because video can be synced across all platforms and screens thanks to cloud computing, retransmission could be less profitable than the company’s most recent earnings report would suggest.
Based on the key metrics above, CBS looks like it could continue OUTPERFORMING over the long term.
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