Investors are having a rough ride early in 2016 with the S&P 500 posting a 9% through the first three weeks of the year — the worst start in the index’s history. And while media stocks aren’t getting hit quite as hard (off 8% in the early going), stocks like CBS (CBS) haven’t been this cheap in some time.
Morgan Stanley (MS) CEO James Gorman said last week that there are no problems with the U.S. economy; investors are simply overreacting to the oil price turmoil. While he didn’t comment on the CBS stock price in particular, I believe investors have made the same mistake with the media giant.
Investors have pushed CBS stock down 15% over the past year, which is about three times worse than the S&P 500’s 52-week performance.
Nothing has changed over at CBS. The same fundamentals exist in its business today as were present more than two years ago when a lethargy surrounding CBS stock took hold of investors and hasn’t let go. I believe it’s unfounded and expect CBS stock to test its all-time high of $68.10 in the next 12 to 18 months.
Ratings Still Strong
As of last week, “CBS was the most-watched network last week for the 12th time out the 17 weeks that incorporate the prime-time television season,”according to My News LA. Sure, the Green Bay-Arizona game on NBC took the top audience of the week (it was quite a game) but CBS continues to deliver entertaining product for its viewers, and that’s the name of the game when it comes to attracting advertisers.
Meanwhile, the premium cable networks are doing quite well. Showtime’s new series, Billions, starring Paul Giamatti and Damian Lewis, is off to a very hot start delivering the best debut of an original series in the cable network’s history with 3 million views. That’s 90,000 more than Ray Donovan, the previous record holder.
“It’s a testament to the timeliness of the subject matter, the power of its stars and the brilliance of the show creators that Billions has had such a big start,” said David Nevins, Showtime’s president and CEO. “I can’t wait for our subscribers to experience how this season unfolds.”
Super Bowl 50
You’d have to be living in a cave not to know the NFL’s big game February 7 will be an historic occasion — the playing of the 50th Super Bowl. To honor this special anniversary, the NFL’s logo was altered this season to a shade of gold rather than the traditional red, white and blue.
The big game last year took in $345 million in total revenue, thanks largely to an average price tag of $4.4 million for a 30-second commercial. This year, media buyers expect CBS to take in more than $400 million in ads with 30-second spots going for the ungodly price of almost $5 million.
With approximately 40% of the ads running 60 seconds or longer, only the deepest pockets will be hawking their products and services on Super Bowl Sunday.
What’s good for the NFL is definitely good for CBS stock.
Everyone Loves a Sale
Trefis projects that CBS will generate total EBITDA in 2016 of $3.95 billion on total revenue of $14.36 billion. Its model implies that the CBS stock price should be worth $62.35 per share, considerably higher than the mid-$40s where it currently trades.
Granted, the current multiple of 16 times 2016 earnings is hardly bargain bin territory. However, flip that on its head and you get a current earnings yield of earnings yield of 7% — 32% higher than the S&P 500, and a projected 2016 earnings yield of 8.4%.
CBS Stock Bottom Line
We have a company that’s well run by CEO Les Moonves and add in some of the drivers mentioned above. Now, mix in a valuation that is fair at the very least, if not downright cheap, and combine that with saner heads prevailing when it comes to the markets. What’s the result?
CBS stock will go up — perhaps not to $68 right away — but at least into the $50s.
The time to buy CBS stock is now.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.