CBS’ Earnings Announcement in Detail

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CBS (NYSE: CBS) posted adjusted share EPS of $0.64, versus $0.57 in the prior-year December quarter. Growth was driven by higher advertising sales, as well as affiliate fees. But, as someone who sees the company’s stock for its long-term value, the notable portions of the earnings call were CBS’s plans on how it will sustain profit gains over the quarters and years subsequent to this. I believe the management aims to boost shareholder returns, while updating its businesses for continued solid performances. As such, earnings are likely to remain on an upward path.

Network Programming Plans

CBS, already responsible for the vast majority, 17 of the top 20 in a recent week, of the most-watched programs on television, is building an unusually new slate of summer series. Such upcoming broadcasts will include the miniseries Under the Dome, and seasons of Big Brother plus Unforgettable. It also hinted at another reality series to be premiered. The gist is that the typically slow summer TV schedule may well support ratings better than anticipated this year.

On the cable television side, it is capitalizing on investments in Showtime hits such as Dexter and Homeland, while bringing new series to that premium network that should attract viewers and thus subscribers. Indeed, Cable Networks segment operating income rose to $185 million in the fourth quarter, up from $175 million, a 6% jump.

Moving on to syndication, CBS has an impressive library of network series to sell to cable. Some of these for 2013 are NCIS: Los Angeles, and The Good Wife, while Hawaii Five-O and Blue Bloods will go into syndication in 2014. Its cable shows are apt to gain audiences in the U.S. and internationally, too. In all, CBS’ programming can carry it for now and years to come on cable.

Two Significant Deals

CBS is securing its profitability through changes in its revenue stream. Recently, for instance, it renewed and expanded its streaming agreement with Amazon.com (NASDAQ: AMZN) Amazon operates a video-on-demand service broadcasted on the Internet. Furthermore, CBS is divesting its European and Asian Outdoor business, while transforming its U.S.-based outdoor unit to a REIT. The transactions ought to allow for a faster-growing top line over the coming years. Retransmission revenue increases are another potential source of enhanced growth that management discusses.

Bolstering Share Earnings

A 2012 debt refinancing is resulting in reduced interest costs. Also, cash continues to be utilized for share buybacks, and a modest dividend. The benefits of these activities flow to the bottom line. CBS is thus poised for earnings growth when the operating environment is positive, specifically when ad spending by large groups such as automakers, financial services firms, and retail firms, among others, is rising. A more thorough overview of why CBS might well have profit upside over the 3- to 5-year stretch can be found in my earlier blog: “CBS as a Long-Term Holding.”

Takeaways

The key revenue component, advertising, remains on the increase. Cable is expanding its presence and CBS may grab increased share of that market (in addition to Showtime it also owns the CBS Sports and Smithsonian Networks). If CBS can maintain its top position in the broadcast network market, while diversifying into growth businesses simultaneously, it should be a good selection. A favorable economy would help, as well. I continue to like the shares long term. Along with that, I also reiterate my recommendation of television station owners, including Sinclair Broadcast Group (NASDAQ: SBGI) as an income holding. Those entities are cash rich and pay substantial dividends. Sinclair owns broadcast stations in small- and mid-sized markets. Sinclair, too, is dependent on a stable ad market, but faces more challenges than CBS due to a lack of asset diversification. Its sole business is the ownership of broadcast TV affiliates, the largest proportion being FOX stations. Earnings are healthy, though the rate of growth, if any, is apt to be slim.

Summary

CBS is intent on not only being the most popular television network, but broadening its audience into new media platforms and altering its asset mix for the purpose of enhancing profitability. It is, as always, returning cash to shareholders, as well. Accordingly, I continue to think CBS is a good long-term portfolio addition. 

 


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