A lot of TV stocks have reason to fear the cord-cutting trend, but CBS (CBS) isn’t one of them.
CBS looks much better prepared than many of its peers to weather the acceleration of cord cutting and slimmed down TV packages, also known as “skinny bundles,” sweeping the country.
Investors who want exposure to a major TV content producer should definitely buy CBS stock, given its ability to adapt to and even profit from these trends. Moreover, it has many medium- and long-term catalysts that should push the stock higher over the next six to 12 months.
Need proof? CBS earnings, which it reported last night, illustrate how its highly popular content can enable it to perform well even as cord cutting and skinny bundles proliferate.
CBS Stock Delivers Solid Earnings
CBS earnings came in at 74 cents per share after excluding certain items related to its restructuring initiative — slightly above expectations and the year-ago figure. Revenue came in at $3.22 billion — a hair above the consensus outlook.
The 40% year-over-year jump in retransmission and reverse comp revenue was a major reason why CBS was able to beat expectations and escape the fate of Disney (DIS), which saw its stock plunge after it reported its results yesterday morning. Retransmission refers to revenue that CBS obtains from cable and satellite providers that broadcast its stations, while reverse compensation is the revenue that CBS receives from local TV stations that broadcast the CBS network.
CBS said that it would obtain $1 billion in annual revenue from retransmission and reverse compensation by 2016, versus its previous target of reaching that milestone by 2017. The company also expects to exceed its previous target of $2 billion in retransmission and reverse compensation by 2020.
Meanwhile, overseas revenue at CBS jumped 20% year-over-year According to CBS CEO Les Moonves, as more U.S. companies begin offering Internet video overseas, local broadcasters are looking to buy better content to compete, and more of them are turning to CBS. That’s good news for the long-term picture of CBS stock.
However, not everything is wonderful at CBS. Revenue rose just 1% year-over-year, and its content and distribution revenue declined 10% last quarter, although the company blamed the drop “on the timing of domestic TV licensing sales.” Finally, its ad revenue fell 3% year-over-year.
Other Initiatives Powering CBS Stock
But CBS has many positive catalysts that should kick in over the next six to 12 months. As Moonves pointed out, most of the many new Internet TV and skinny bundles that were recently launched or will soon debut will include the CBS network. All of those services will have to pay CBS a fee, providing the company with an additional revenue stream. And according to Moonves, the scatter ad market is “accelerating rapidly in the third quarter with double digit gains in pricing.”
Moreover, the CEO indicated that CBS is in talks about selling streaming rights to its content to a number of large companies. Meanwhile, the media conglomerate has launched its own streaming offerings. Specifically, it is selling subscriptions to streaming versions of Showtime, the CBS network and CBS news programming.
According to Moonves, 90 million households that do not currently have Showtime can now buy the Showtime streaming service. “Capturing just a small percentage of these subscribers will begin to pay off immediately and will lead to a tremendous upside for us,” Moonves stated. The streaming service will enable CBS to profit from the cord cutting trend that appears to be gathering steam.
Also likely to boost CBS stock earnings is its broadcast of the Super Bowl in early 2016, the large amount of political spending next year and the arrival of the very talented Stephen Colbert, who will host a late-night show on the CBS network starting next month.
Like the other broadcast networks, CBS is facing some major headwinds. But it is better positioned than many of its peers, and its popular programming and multiple catalysts should push CBS stock higher over the medium and longer term.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
