Any way you slice it, when it comes to television broadcasting, CBS (NYSE:CBS) has been the big winner in 2011. Its stock is up 32.3% year-to-date while its four biggest competitors in terms of market cap are averaging a 14.7% decline. Charlie Sheen’s departure seems to have lit a fire under its stock, and the future looks bright. Playing devil’s advocate, I’m going to suggest why now might be the perfect time to sell its stock.

Financial Health

Henry Blodget wrote an article for Huffington Post back in October 2009 that examined whether CBS was on the verge of bankruptcy. He concluded that although it was highly leveraged and its cash flow was seriously deteriorating, if ad spending improved, Sumner Redstone’s baby would be fine.

Advertising has improved, and CBS’ cash flow and financial health is indeed much better. Two years ago, it had $7 billion in debt and just $341 million in cash. As of the second quarter, its debt is 14% lower at $6 billion while its cash position is 281% higher at $1.3 billion.

Business clearly has improved but that doesn’t mean you should become complacent. The television business can turn ugly in a hurry. If you calculate CBS’ Z-Score, a good predictor of a future bankruptcy, you get 1.47. Anything less than 1.81 is a high probability. Some question the Z-Score’s usefulness, but it does point out how important the balance sheet is when assessing a company’s financial health. It’s not always as it appears.

Earnings

CBS’ second quarter was excellent. Revenues increased 8% and operating income before depreciation and amortization 51%. All five segments increased OIBDA profits year-over-year, with margins improving 700 basis points to 24%. There’s not much to quibble over. Even free cash flow increased 30% to $1.5 billion in the first six months of the year.

Comparing previous periods is difficult thanks to the impairments in 2004 and 2005, as well as the spinoff of Viacom (NYSE:VIA). Using operating income as my guide, I can see that 2007 was its best year since the spinoff at the end of 2005. Therefore, I’m going to compare the second quarter this year with the second quarter in 2007. Operating income in the second quarter this year was $734 million compared to $750 million in 2007. Revenues were $3.6 billion in 2011 versus $3.4 billion in 2007. Therefore, the operating margin in 2007 was 170 basis points higher at 22.1%. Assuming it continues to deliver good results, 2012’s second quarter should be higher than 22.1%. At the end of the day, there’s almost no difference between the quarters. A skeptical person might suggest that not much has changed at the broadcaster except the departures of Katie Couric and Charlie Sheen. Time will tell.

Valuation

Multiply the P/E, P/S, P/B and P/CF ratios together and you get 246. Doing the same for 2007 gets you 181. According to these four ratios, at least, CBS stock got a lower valuation in 2007 despite higher profitability. In the three-plus years since, the S&P 500 price-to-book ratio dropped 22% from 2.7 to 2.1. Meanwhile, CBS’ P/B increased almost double, from 0.9 to 1.7. It’s hard to imagine the ratio rising much higher.

Even so, as long as CBS continues to generate reasonable profits, the retained earnings deficit will gradually shrink, increasing shareholder equity; its stock price could still rise without further expansion of the multiple. Existing CBS shareholders had better hope so. Any slip in profitability likely will drive that multiple back to historic norms, knocking its stock price down as well.

Bottom Line

I think the biggest risk to CBS’ stock right now has nothing to do with dollars and cents. Rather, it’s what happens if Sumner Redstone dies suddenly. What then? Is CEO Les Moonves in charge, or does fellow board member Shari Redstone, Sumner’s daughter, take over? It could create a leadership vacuum similar to what many imagine will happen if Warren Buffett dies. Times are good, so the question isn’t on the table, but that day’s coming soon. It’s quite possible that CBS’ stock has reached the top of the mountain.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.