The Internet has forever changed the media space in a very short amount of time; there are more ways to get more stuff than ever before. CBS operates in four segments with the corresponding operating profit in each:
- Entertainment – 41.5%
- Cable Networks – 30%
- Publishing – 3.5%
- Local Broadcasting – 25%
While CBS has dealt with some top line challenges over the last five years, earnings are another story; net income has basically doubled over that same time as the company streamlines its operations. In 2014 it spun off its outdoor advertising company, now Outfront Media (NYSE: OUT) and is now working on spinning off its radio business with a potential IPO coming soon.
Shares are trading at less than 20 times trailing earnings which could reflect some uncertainty on how the business looks a year or two from now as CEO and Chairman Les Moonves focuses on delivering high value content for viewers however they choose to consume it. Cord cutting is less of a concern as long as you’re taking advantage of the various methods of distribution that exist today versus just 10 years ago.
While net debt of just a bit more than $8 billion can seem a bit concerning at first glance, operating profit covers it more than seven times over and the debt is staggered out nicely over many years all the way to year 2045. The biggest question really is if they can continue to deliver the goods in the face of an ever-growing competitive environment. Online channels like Netflix and Hulu, while competitors to an extent today also serve as partners, but that won’t always be the case as they are producing more and more original content. In this game content is king and you gotta pay to play.
Still, Moonves has a lot of experience in the industry and I believe he's prepared and excited to take this business forward with properties like Showtime as well as high-value sports content like the NFL, NCAA basketball and football and of course the Masters. It’s also worth noting that CBS’s dual class share structure gives National Amusement close to 80% of the voting power and as Sumner Redstone’s legacy takes shape that could certainly have an effect on CBS and its role going forward. However National Amusement’s interest in CBS means it’s interested in CBS’s success, so I consider that a plus at the end of the day.
CBS shares have a history of performing well for investors. This is a cash flow rich business with a lot of valuable assets in the space. Smart leadership in Les Moonves could prove to be the ultimate catalyst in taking the stock to higher ground.
Disclosure: I own no stocks mentioned in this piece.