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May 16, 2014

CBS Healthy Despite Share Turbulence

CBS Corporation (CBS) reported slightly better than expected March quarter results. It was not enough to turn the recently negative sentiment in the shares, however. The day after the report CBS closed down a little over 2% after falling nearing 5%. Year-to-date CBS is down 11% despite good earnings, positive news on capital allocation, and a confident management outlook.

I think the stock is caught up in two negative trends. First, consumer discretionary stocks, including media, are seeing heavy profit taking after huge gains in 2010 thru 2013. Second, I think a lot of hedge funds and mutual funds with a growth strategy have used CBS and other media stocks as core holdings. CBS has been caught in the rotation from growth to value that began in early March despite the fact that there seems little to worry about on business fundamentals.

The key driver of CBS shares is the fact that the company will likely buyback nearly 20% of its shares this year without stretching its balance sheet at all. In fact, next year an additional 15% buyback looks likely if the company merely reaches its debt target…a leverage level that is still investment grade.

The share buybacks are being driven primarily by excellent business fundamentals. CBS has performed well on advertising, grown its subscription fees, increased profit contribution from content it creates, and strictly managed its expense structure to produce record high profit margins. The company has also managed its asset mix including the spinoff and upcoming exchange offer for its outdoor business. The bottom line is CBS is a more profitable, less cyclical, better managed, more shareholder friendly company than it has ever been.

Investor concerns surround a mixed advertising environment over the past six months, long-term worries about the TV business model, and the upcoming Aereo decision at the Supreme Court. One possible new worry is that following this year’s accelerated share buyback, the company could turn its eye toward acquisitions.

Despite the recent pullback, the stock has done very well, up 10 times from the summer of 2009. Nevertheless, CBS still trades at a discount to its peers, which I see as unwarranted. I think the pullback has created a buying opportunity and believe the stock can move to the high $60s or 17 times 2015 earnings. Even better, I think you can make a strong case that 2015 estimates will prove too low by 6-8% based solely on the reduced shares outstanding from the upcoming CBS Outdoor (CBSO) exchange and further buybacks.

CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. CBS is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Posted by Steve Birenberg at May 16, 2014 10:35 AM in CBS