Apple and CBS Are Too Cheap to Ignore

by Jonathan Berr | October 23, 2012 12:30 pm

Apple and CBS Are Too Cheap to Ignore

Apple (NASDAQ:AAPL[1]) CEO Tim Cook was paid $378 million last year, the highest salary of any CEO in Silicon Valley. CBS (NYSE:CBS[2]) CEO Les Moonves recently received a signing bonus worth $22 million as the media company extended his contract through 2015. Both CEOs are worth every penny because their companies are poised to benefit from America’s changing video consumption habits.

Apple, which is set to unveil its iPad mini today and is reportedly working on a video-streaming service, has seen its shares rise more than 50% this year, and CBS shares are up about 25%. Both stocks are cheap compared to their peers. Apple’s price-to-earnings ratio is 14.9, near its five-year-low, according to Reuters[3]. New York-based CBS’s multiple is 15.18, which also is near a five-year-low. The case to buy both shares now is compelling.

When it reports earnings on Thursday after the bell, Apple is expected to boost revenue by 28%, equaling expectations for Amazon (NASDAQ:AMZN[4]). The e-commerce giant, which is aggressively marketing its Amazon Prime streaming service, trades at a multiple above 230. Revenue at Netflix (NASDAQ:NFLX[5]), another streaming-media player, is expected to surge more than 10% this quarter. It trades at a P/E of 38.44.

The contrast for CBS is almost as stark. Shares of the New York-based media company are outperforming its corporate sibling Viacom (NYSE:VIAB[6]), even though its prospects are much better. Analysts expect CBS, best known for its namesake broadcast network, to report a 4% gain in revenue during the current quarter, compared with a 16% decline at Viacom, parent of the MTV networks.

CBS shares are also underperforming Walt Disney‘s (NYSE:DIS[7]), which have surged more than 38% even though revenue is expected to grow just slightly more than CBS’s, at 4.8%. Fox parent News Corp (NASDAQ:NWS[8]), whose shares are up 36% this year, is forecast to raise sales 2.8%. Comcast (NASDAQ:CMCSA[9]), parent of NBC, isn’t an apples-to-apples comparison since it’s also the largest cable company, but it’s worth noting that revenue at NBC Universal, slumped 0.8% to $5.5 billion in the last quarter.

The TV business is undergoing a sea change. Networks, as most people understand them, are coming unglued as viewers increasingly consume the video content they want when they want it. A study released last week by Ad Age found 42% of respondents reported[10] that they were watching more streaming content than they did in 2011.

That’s obviously good news for Netflix, Amazon and Apple. It’s also good news for media companies because the Ad Age survey found that 73% of those who viewed streaming content were doing so to catch up on episodes of their favorite shows.

Digital revenue will be increasingly important for TV network owners in coming years as streaming becomes more common. Moonves crowed about it during the CBS’s earnings conference call. He has even hinted that CBS would be interested in buying Sony‘s (NYSE:SNE[11]) movie business. Given the precarious state of the Japanese company, such a deal is a strong possibility.

Many pundits have pointed out that CBS is more dependent on advertising than its rivals are. To make matters worse, its flagship network is experiencing double-digit declines[12] in ratings for some of its hit shows, such as Two and a Half Men. The good news, if you can call it that, is that ABC and Fox are having the same issue. NBC has surged to the top of the ratings heap at its rivals’ expense, but it’s not clear whether the trend is sustainable.

CBS offers investors low risk and high rewards. Apple is a more of a gamble. Both companies, nonetheless, are poised for better times ahead.

Jonathan Berr is long CBS. Follow him on Twitter @jdberr

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. CBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBS
  3. according to Reuters: http://www.reuters.com/finance/stocks/financialHighlights?symbol=AAPL.O
  4. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  5. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  6. VIAB: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIAB
  7. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  8. NWS: http://studio-5.financialcontent.com/investplace/quote?Symbol=NWS
  9. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  10. respondents reported: http://adage.com/article/media/catching-cord-cutting-drives-content-streaming/237822/
  11. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  12. double-digit declines: http://www.nytimes.com/2012/10/22/business/media/nbc-finds-itself-in-unfamiliar-territory-on-top.html

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