CBS Fuels Margins With Licensing Deals, $33.50 Estimate
Source: CBS Network's SEC Filings
CBS (NYSE:CBS) reported its Q3 2011 earnings recently and while the revenue growth was quite low, the profit boost was the highlight. The company has continued with this trend of improving margins since last year, and consequently seems to have positioned itself strongly in eyes of its investors. The stock has increased more than four-fold since 2009, thanks to the cost restructuring efforts and role of additional revenue streams directly boosting the profits. CBS has also continued with top ratings, ahead of its rivals’ networks such as those of Disney (NYSE:DIS) and News Corp (NASDAQ:DIS).
We maintain our price estimate for CBS at $33.50, implying a premium of more than 30% to the market price.
Revenue Growth Low, But Margins On Rise
The company fell short of consensus estimates for revenue for Q3 2011, but it more than made up for that with continued growth in margins across all divisions. Not only these margins have improved over prior year, they have improved sequentially this year, quarter after quarter, with exception of local broadcasting and outdoor businesses that posted slightly lower margins compared to Q2 2011. This could be attributed to lack of political ad spending that affected revenue growth as well.
The margin improvement is notable for CBS broadcasting network and cable networks that include several channels such as Showtime, Flix, The Movie Channel etc. What’s helping here is the growth in international syndication business and increased licensing of content to online distribution platforms such as Netflix (NASDAQ:NFLX) and Hulu.
Expect The Company To Sustain These High Margins
Going forward, we expect CBS to maintain these high margins that it has reached over the course of past few quarters. What bodes well and supports this hypothesis is expected proliferation of online video which will not just allow additional dollars to flow in, but also give certain pricing power to content owners like CBS and lead to further growth in revenues. This will directly impact the margins since this is incremental revenue flow. On the flip side, the content costs could also rise as CBS tries to maintain its top position in the market. Overall we expect that the company will be able to maintain the high margins. Additionally, the advertising dollars can benefit from election cycle in 2012.
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