CBS Stock Is Facing Many Tough Headwinds

During CBS’ (NYSE:CBSrecent earnings conference call, neither company executives nor Wall Street analysts brought up allegations made two days earlier in a lawsuit by shareholders. The plaintiffs alleged that several current and former executives sold $200 million of CBS stock shortly before the sexual harassment allegations against ex-CEO Les Moonves surfaced.

CBS stock has multiple headwinds, including a shareholder lawsuit and a CEO search. Still, CBS' strengths make CBS corporation stock attractive.

Investors are also ignoring the allegations. CBS Corporation  stock has surged nearly 15% since the start of the year, outperforming its peers, including Walt Disney (NYSE:DIS), which rose less than 10% and Comcast (NASDAQ:CMCSA), which has jumped 13%. Unfortunately, the case is yet another distraction for a management team that has more than its share of them, including the search for a permanent CEO and CBS’ much-anticipated merger with Viacom (NASDAQ:VIAB, NASDAQ:VIA).

Disturbing Lawsuit Allegations

The allegations were made in a court filing as part of a lawsuit seeking class-action status, and filing legal actions is far easier than prevailing in court. Furthermore, I understand that CBS is defending the stock sales by pointing out that many were part of transactions scheduled in advance with the Securities & Exchange Commission and that others were cleared by the company.  Even so, the SEC likely will investigate the situation to determine if any laws have been broken.

While many analysts are expecting the much-hyped CBS-Viacom merger to happen sometime this year, the road ahead for the combined companies is uncertain. The combined entity would have a market capitalization of roughly $30 billion, less than 20% the size of its rivals Walt Disney and Comcast, which both have market values of more than $160 billion. That means that as soon as the ink dries on the CBS-Viacom deal, the company would have to make another acquisition. Among the rumored targets are Sony Pictures Entertainment and Discovery Communications (NASDAQ:DISCA).

Despite its considerable baggage, the valuation of CBS stock is attractive. CBS Corporation stock trades at a multiple of ten times analysts’ consensus earnings estimate for 2019 and less than eight times next year’s consensus earnings estimate.  That’s cheaper than Disney’s 16 multiple for both 2019 and 2020 consensus earnings estimates and Comcast, whose estimated P/E ratios for 2019 and 2020  are 15 and 12, respectively.

CBS Stock Has Plenty of Gas

CBS bulls like Michael Nathanson of MoffettNathanson argue that CBS stock will rise once the company picks a permanent CEO and discloses the timing of its merger with Viacom. In a recent note to clients,Nathanson argued that absent an “advertising recession,” CBS stock poses very little downside risk. He has a $65 price target on the stock, 30% above its current prices.

While I agree that CBS Corporation stock is quite cheap, I am leery about recommending a stock that has even the tiniest possibility of being affected by an insider-trading scandal. But I am willing to overlook my qualms in the case of CBS stock because the company’s high-quality content gives it a competitive edge in the market, regardless of who runs the company.

Jonathan Berr has done freelance writing for CBS  He owns a small amount of CBS stock.

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