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Wall Street Is Missing the Boat on CBS

The most-watched network is best-positioned to benefit from increased ad spending


During its latest earnings conference call, CBS (NYSE:CBS) CEO Les Moonves bragged that 2012 “will be an even better year than the last, and one in which we are poised to break records in financial metrics across the board.” Wall Street thinks all that good news is already factored into the company’s stock price. Here’s why that’s wrong:

Shares of CBS are up more than 20% this year and are trading near the $34.75 one-year average price target of Wall Street analysts. But it’s still cheap.

The stock is trading at a price-to-earnings ratio of 17.85, well under the five-year high of 42.36, according to Reuters. That premium multiple to its peers is well-deserved. Revenue in the current quarter is expected to rise 7.3%, better than the 5.5% forecast for Walt Disney (NYSE:DIS) and the flat growth projected for News Corp. (NASDAQ:NWSA). Comcast’s (NASDAQ:CMCSA) NBC Universal had little revenue growth in the fourth quarter and probably had the same performance in the first quarter.

In 2012, CBS will benefit from stronger-than-expected advertising sales spurred by the improving macroeconomic environment. Streaming deals the New York-based entertainment giant entered into last year also are beginning to pay off, according to Needham & Co. analyst Laura Martin, who recently reiterated her “buy” rating on the stock.

Automakers are expected to increase spending on television advertising as their sales continue to climb. March light-vehicle sales may show a seasonally adjusted annual rate of 14.5 million, topping the 13.1 million level of a year ago as high gas prices spur people to buy smaller vehicles, according to Bloomberg News.

That means one thing for CBS, News Corp.’s Fox, Disney’s ABC and Comcast’s NBC Universal: more television commercials. A recent Moody’s report argued that rising auto sales will boost sales at the upfronts, where networks sell advertising for the new TV season, and that CBS is in the best position to benefit from the trend.

“As it derives as much as 64% of its overall revenue from advertising, CBS Corp. is best-situated to take advantage of big gains in the auto category,” according to Ad Week, adding that NBC Universal gets 36% of its revenue from ads. The impact is smaller for Disney and News Corp. since they’re so diversified.

CBS, which has a history of beating Wall Street estimates, is in a strong position to demand steep price increases from advertisers. The company’s flagship network is the most-watched network, averaging 9.7 million viewers during the week ended March 25. It also attracted the most viewers in the 18-to-49 demographic coveted by advertisers.

Five out of the 10 most-watched shows for the week, including the NCAA Basketball Championship, were on CBS. Meanwhile, ratings on cable networks have been declining on some of the major channels.

CBS has 28 local TV stations in major markets such as New York, California, Illinois and Pennsylvania that will likely see a bump in advertising as the economy rebounds, along with ad spending on the Presidential election.

Ditto for its 130 radio stations and its 450,000 outdoor media displays. A Borrell Associates forecast projects that election spending in 2012 will hit $9.8 billion, up from $7 billion in 2008. If the hyper-partisanship of the primary season is any guide, that estimate may prove to be conservative.

All in all, CBS may have plenty of upside surprises for adventurous investors.

Jonathan Berr does not own shares of the companies listed here.

Article printed from InvestorPlace Media,

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