Positive Margin Outlook for CBS after Steep Declines

U.S. media giant CBS (NYSE:CBS) struggled with declining profits and cash flows during the recent downturn, which savaged the company’s advertising sales business. We expect profit margins at CBS to improve going forward, thanks to judicious cost-cutting and the recovering ad market.

CBS competes with other broadcast networks like  Disney’s ABC (NYSE:DIS), NBC Universal’s NBC, and  News Corp’s Fox network (NASDAQ:NWS). CBS makes money primarily by selling  on-air and outdoor advertising, by licensing TV shows such as CSI, Jeopardy!, Medium, and Survivor, and by charging fees to cable and satellite operators in exchange for carrying premium channels such as Showtime and Flix.

Our analysis follows below.

Rising ad revenues should boost margins

CBS incurs significant fixed costs from its national TV network, local TV stations, radio stations and outdoor advertising division. Over-dependence on advertising makes these businesses vulnerable when marketing budgets decline during hard economic times.

In its most recent earnings announcement, CBS noted that the ad market was improving and that revenues were rising at its  local TV stations and at CBS Radio. Because the company’s costs are relatively fixed, this revenue growth should produce significantly better profit margins. You can modify our forecast in the chart below to see how changing EBITDA margins at CBS Network impact the company’s stock price.

The CBS Television Network has historically relied exclusively on ad revenues. Going forward the network business should benefit from rising retransmission fees, a new revenue stream for the company. CBS expects to earn over $100 million in fees this year from cable companies like Comcast and Time Warner Cable that retransmit signals from local CBS stations. We expect these fees will rise to close to $400 million by end of our forecast period. And as the midterm elections approach, we expect rising political ad spending to boost outdoor advertising margins.

Cost-cutting helps too

CBS has made significant efforts to cut costs across its businesses in recent years, which  bodes well for EBITDA margin growth going forward. For example, CBS realized significant back-office savings by  reorganizing its radio and TV divisions.  The company is also reducing its radio programming costs by shedding expensive talk show personalities in favor of popular music programming.

You can see the complete $17.15 Trefis stock price estimate for CBS here.