CBS Leads More Solid Media Results

Given the increased importance of macro issues on the stock market and record high correlations among individual stocks, I am expanding media company earnings analysis this quarter to touch on all companies and major trends, not just Northlake positions.

Media earnings season continues to roll along. The message so far is that media fundamentals are largely intact in the previously bullish zone with the possible exception of cable systems owners. However, something else is obvious. Analysts are skeptical and investors do not care about third quarter results, fourth quarter guidance, or earnings beats and guidance driven by sale of digital rights to the likes of Netflix. All that matters is that media companies, particularly those exposed to advertising, have limited visibility on 2012.

Analysts and investors are obsessing over any sign that advertising has slowed or will slow. Clearly, the extremely robust strength in ad demand and ad pricing has moderated. Ad pricing is still at premiums to prices in May's upfront. Certainly, that is a bullish barometer. However, premiums are lower than they were a year ago at this time and comparing scatter, or spot, pricing on a year-over-year basis also indicates a deceleration. The fact that scatter pricing seems highly correlated with individual network rating performance is another sign the ad market has cooled.

The Street is clearly worried that low visibility and the uncertain macroeconomic environment will result in an abrupt collapse in the ad market in early 2012. The precedent is 2008/2009 following the Lehman bankruptcy.

I suspect this skepticism is going to continue until either the economy and ad market hold together or fall apart. Media stocks at very reasonable valuations if the bull case wins out. Upside of 20-40% is possible. The bear case is declines of similar magnitude.

We have yet to hear from Liberty Media, Viacom, AMC Networks, and Disney. Those are coming next week. Among those that have reported, I would rate CBS first, Discovery Communications second, News Corporation third, and Comcast fourth in order of attractiveness. Each has good fundamentals, arguably with upside to 2012 earnings estimates. Northlake's individual stock strategy is to be narrow and focus on the best ideas within media. Thus, clients own CBS and Discovery. But remember, the economic outlook rules and even the best reports will make you little money until the Street is willing to take a bullish look at 2012 advertising.

Here are quick recaps of the latest earnings reports:

News Corporation beat pretty much across the board. Led by Cable Networks, all segments are on a solid footing except for Publishing. The company's cable nets seem likely to have the highest growth rates and comments on the ad outlook were second most positive to CBS. Share buybacks are providing meaningful support to the stock. The UK scandal is on the back burner for now and seems unlikely to cause significant new problems.

Scripps Interactive (SNI) had a mixed quarter with the key takeaway being lower than expected advertising growth. Most financial measures were largely in line though as cost came in lower than expected. Management "saved" the quarter by affirming full year guidance, implying a strong fourth quarter. Analysts compute that the company needs mid-teens ad growth in 4Q to make the guidance. That seems like a stretch but one month into the quarter management probably has good visibility. Ratings remain inconsistent. Food has recovered but HGTV is still lagging and Travel is encountering its first difficult ratings period since being acquired by SNI.

DirecTV (DTV) had a strong quarter showing that there is still growth for multichannel television if you can gain market share. The free NFL Sunday Ticket promotion for new subs worked very well as gross adds, churn, subscriber acquisition costs, and monthly ARPU all were as good or better than expected. Marketing costs were up but management notes that may be a good investment as the company has 1 million new subs to target for retention a year from now versus the usual 300,000 after the start of football season. Latin America continues to show exceptionally strong growth although there was no blowout above expectations. Share repurchases remain robust.

CBS again crushed estimates due to the combination of high margin Netflix revenue and expense control. The street seems unwilling to pay for the digital revenue for the time being and is skeptical that margins can be maintained. Some of the margin gain is coming from programming which is bucking the trend throughout the industry. There was no change in the usually confident tone of management. 4Q looks very strong and upfront cancellations for 1Q12 are no worse than normal, maybe a little better. If you believe in the economy and ad market in 2012 there is no better place to invest in media than CBS.

Disclosure: CBS and DISCK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. VIA.B, AMCX, DISCK, CBS, and DTV are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.

Les is More at CBS

Les is More! CBS delivered another outstanding quarter. Led by Les Moonves, CEO and President, CBS continues to put in by far the best performance of any media company.

CBS reported EPS of 58 cents, well in excess of the 45 cents consensus. Revenues were just a bit ahead of expectations at $3.59 billion vs. consensus of $3.55 billion. EBITDA of $873 million was $110 million ahead of consensus as once again margin performance was outstanding. EBITDA margins of 24% are way ahead of even the most aggressive analyst estimates.

$100 million of the $110 million EBITDA beat came from the Entertainment segment. Upside from the domestic Netflix deal likely accounted for a lot of the gain. Analysts and investors will surely fret that this is one-time but as Moonves noted deals recently announced with Netflix abroad and Amazon in the US are not in the 2Q numbers.

Strength was also seen at Showtime leading the Cable Networks segment to beat EBITDA expectations by over 9%. Local Broadcasting assets performed inline with expectations which is not bad at all given very tough comps in political and a lull in auto ads due to the crisis in Japan. Only Outdoor fell a bit short of expectations.

CBS is benefiting from the fact that it does need to replace DVD sales revenue. Instead as it leads the industry in selling content to Netflix and other online video distributors, all of the upside is incremental revenue at extremely high margins.

Investors will worry that advertising will falter along with the economy. I think CBS has some defense against this line of thinking given a just completed very strong upfront and a big 2012 with political and Olympics tightening the market.

CBS has generally traded at a discount to other entertainment stocks due its heavy reliance on advertising. Under Moonves, the company is performing beautifully on advertising while diversifying into content and subscription fees. Both the new areas have more upside.

Superb execution, strict cost controls, diversification from advertising, and aggressive return of cash to shareholders warrants multiple. Positive business momentum and these factors provide protection against economic concerns. In a decent market, CBS can trade to the mid $30s. It remains my top pick in media and communications.

Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CBS is a net long position in the Entermedia Funds, long/short equity hedge funds focused on media, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in the Funds' investment management company, and has personal monies invested in the Funds.

CBS and Virgin Media Momentum Continues

CBS and Virgin Media (VMED), two of Northlake's larger holdings thanks to excellent stock price performance, reported earnings a few weeks ago. Both companies reported good results supporting the higher stock prices and setting the stage for future gains.

Entering the report, I was a little worried about VMED due to strict austerity measures in the UK economy including higher valued added taxes. At the VMED analyst meeting we attended a few months ago, the company warned that early 2011 would be challenging. The quarter has hardly a blockbuster but mid single digit revenue and EBITDA growth built on inline to better than expected subscriber growth and ARPU was an excellent performance in a tough environment. Taking the quarter as a sign that austerity is not crimping growth, VMED's 2011 outlook looks better than feared. The company is coping well with a tough environment, probably a sign that that its best in the UK broadband network remains a competitive advantage that the focused management team is exploiting. Free cash flow continues to rise rapidly and the Board is exercising an aggressive share buyback program including purchases at the current prices at the 52 week high. VMED is near my low to mid-$30s price target but I think the bias is higher on the assumption 2012 economic growth in the UK improves. The share buyback, free cash flow, and excellent management execution provide downside protection that makes waiting for comparisons to ease the best course of action.

CBS reported blowout results benefiting from strict cost controls and good ratings that limit the need for aggressive programming spend. I have felt for several months that analyst estimates were way too low for 2011 due primarily to overly pessimistic expense assumptions. In addition, the national TV advertising market remains more robust than most observers had predicted. This combination is creating very high operating leverage, driving margins to previously unexpected levels. I see this situation as sustainable through 2012. Analyst estimates rose sharply following the quarter but remain too low in many cases. Free cash flow is being returned to shareholders with aggressive share buybacks and meaningful dividends. Many investors continue to see CBS as a cyclical play. No doubt the high exposure to advertising brings cyclical but overlooked is the rising importance of subscription and retransmission fees, derisking of programming investment via presale of international rights, and permanent cost controls. Along with the aggressive capital allocation strategy, these factors make CBS look more like premium valued cable networks. I think the stock can work to the mid $30s in 2011 assuming the economy remains on a recovery path.

Disclosure: CBS and Virgin Media are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CBS and Virgin Media are net long positions in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.

Plenty of Upside to Estimates and Stock Price at CBS

CBS reported slightly better than expected 4Q10 results, no small feat given rapidly rising estimates and a surging stock price. Adjusted EPS of 46 cents beat the street consensus of 44 cents. Revenues of $3.9 billion exceeded consensus by about $50 million. EBITDA was better than expected at the segment level, driven by beats at radio and TV stations, Showtime, and Outdoor.

CBS does not provide guidance but commentary about strength in advertising continuing in 1Q and set up for strength throughout 2011 is encouraging. In addition, management reiterated excellent expense control in 2011. The only flaw I see is that management stated that 1Q11 revenues would be down year over year due to last year's Super Bowl broadcast and sharing March Madness revenue with Turner. Consensus is for flat revenue. However, management reiterated that margins would expand considerably and profits would grow despite the down revenues. Consensus EBITDA is 1Q is $436 million, up from $300 million a year ago despite the lower revenues.

Les Moonves opened the call by stating the EBITDA margins in 2011 should at least match the 19.7% reported in 4Q10. Right now, consensus calls for an EBITDA margin of just 18.4%. In addition, given advertising strength and a perfect setup for the May upfront, revenue estimates for 2011 are likely too low despite the down 1Q. In other words, estimates for 2011 are going higher. I expected this given the benefits of a stable primetime schedule, the new NCAA basketball contract, the new retransmission deal with Comcast, new movie contracts at Showtime, and good management of expenses.

Maybe more bullish was Moonves stating that CBS can exceed peak margins within "a couple of years." In 2007, pre-recession, CBS had an EBITDA margin of 22%. If a couple of years means 2012, then estimates for next year are way too low as current consensus is for a margin of 19.4%. Keep in mind that 2012 is going to be mega year for political, something not widely discussed quite yet.

On the risk front, investors will worry if the NFL does not play next season. This would likely pressure CBS shares but Moonves indicated that the contract has protection built in so that it is a timing issue rather than a forever lost profits issue. And ratings are always a risk. Right now, CBS is enjoying ratings at least as good it promised advertisers. But the fall of 2011 is another season and some of the long-time hits at CBS are aging.

With estimates headed materially higher for 2011 and 2012, free cash flow exploding, a great management team, and a commitment to return cash to shareholders, CBS shares remain very attractive despite the huge run over the past two years.

Disclosure: Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CBS is a net long position in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake in the Funds' investment management company, and has personal monies invested in the Funds.

CBS: Is Good Quarter and Buyback Enough?

CBS reported slightly better than expected results in 3Q10. Revenues fell a little short of expectations at $3.3 billion. Estimates called for an additional $60 million. However, excellent margins led to EBITDA of $667 million, ahead of estimates for $642 million. The operating beat flowed through to EPS and the adjusted EPS of 35 cents beat the consensus of 31 cents.

Perhaps the biggest news on the day, however, was the announcement of a $1.5 billion share repurchase program. This is a meaningful amount against market cap of $12 billion. The street was expecting a share buyback this year though timing and amount was uncertain. I think the Street will like this news. Some investors may have been looking for an increased dividend instead of or in addition to a share repurchase. Management noted the share repurchase does not preclude a later dividend increase.

At the segment level, revenues were ahead at Cable Networks, inline at Outdoor, barely light in Entertainment, and short of expectations at Publishing and Local Broadcasting. Advertising gains at the CBS Network, local TV and radio stations, and billboards look as I expected so I am not sure where the shortfall comes from. TV stations were up 25%. I little more there maybe was expected.

Segment operating income saw better than expected results in Entertainment, Cable Networks, Publishing, and Outdoor. Local Broadcasting fell short.

CBS offered 4Q10 guidance commentary with a very positive tone although I am not sure it was better than already high expectations. The CBS Networks is in very strong position given its ratings performance with scatter up over 35%. Online display advertising is pacing up mid-teens. Local TV stations are up over 20%, Radio is up double digits and Outdoor is up high single digits.

For 2011, management provided a laundry list of positives including the strong network upfront and still strengthening scatter, lower programming costs in primetime and for sports, higher retransmission revenues, better Outdoor contracts, expense savings from 2010 restructuring actions, and lower interest expense. It seems to add up to more than the current consensus of 7% EBITDA growth. Tough comps due to political advertising are definitely a headwind, however.

I like the results, the share buyback, and the tone of the conference call. However, the slight revenue miss and some of the segment numbers not hitting estimates (remembering others exceeded) could keep investors cautious. Lots of media companies reporting good but not perfect quarters have seen their shares trade lower. I don’t think that should be the case at CBS but I've been misfiring in my takeaways of this quarter's earnings calls. [UPDATE: CBS shares traded lower following the report and have continued to pullback, reaching a decline of more than 7% as of this writing]

Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC-registered investment advisor. CBS is a net lon position in the Entermedia Funds. Steve is co-portfolio manager of the Entermedia Funds, owns a stake in the Funds' investment management company, and has personal monies invested in the Funds.

Advertising Recovery Accelerating at CBS

CBS reported solid results with EPS, revenue, and EBITDA closely matching street estimates. The report did not provide the big positive surprise seen by News Corporation, with which it has a lot of overlap. This fact, plus some variances to estimates at the segment level, left investors wanting more. There was also some concern that the company did not provide detailed full year financial guidance. The stock traded down sharply after hours and in Friday morning trading but had fully recovered to a moderate gain by Friday afternoon. I think the afternoon reaction is the correct one and that CBS shares remain a great play on an advertising recovery that appears to be picking up steam.

CBS reported that advertising trends accelerated in the fourth quarter at all of its business – network TV, TV and radio stations, and billboards. This was expected though the improvement ran a bit ahead of expectations. The big news, however, is that ad trends so far in 2010 are accelerating further and running ahead of analyst estimates across the board. While this could change if the economy stutters or stumbles, for now, it appears as though analyst estimates were too low. As it turns out, on Friday many analysts raised estimates. I thought this was what I was hearing on the conference call which is why I was surprised by the afterhours decline.

CBS also provided better than expected guidance for 2010 political revenues and for the ultimate run rate on retransmission revenues (fees paid to CBS by cable and satellite companies for the right to carry their programming).

The downside in the report was higher programming expenses at the entertainment businesses (CBS, Showtime, and the new attempt to produce movies). These expenses look set to stay higher in 2010 and beyond. Also posing a challenge in 2010 will be tough comparisons in TV syndication. CBS had a big year in 2009 selling its self produced TV shows into domestic and international syndication markets. The pipeline is not bare but 2010 will see less revenue.

One other aspect of the CBS story that continues to firm up is the balance sheet. The company ended the year with almost $800 million in cash, enough to easily pay off 2009 debt maturities. Free cash flow in 2010 should match or exceed 2009's level as the TV syndication and Super Bowl cash hits the books. I suspect that CBS will refinance some debt that comes due in 2011 and beyond and then turn to a dividend increase and share repurchases later this year. This should serve as a catalyst for the stock along with what I still see as upside to earnings estimates.

Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. CBS is a long position in the Entermedia Funds. Steve Birenberg is co-owner of the Entermedia Funds management company and co-portfolio manager of the Funds.

CBS Shows Upside But Maintains Guidance

CBS reported modest upside to estimates in 3Q09 with most of the excess coming from the syndication business. However, it was still a strong quarter of improvement with the CBS Network returning to positive ad growth, dramatically lower ad revenue declines at the local TV stations, and modest improvement but still deeply negative ad sales at the radio stations and outdoor properties. Furthermore, on the conference call, management noted that Oct and November trends have continued to improve, particularly at the local TV stations which are showing positive growth excluding the huge political spending during 2008's Presidential election.

Management reaffirmed 2009 guidance despite the upside in the third quarter. This disappointed some investors who saw it as a lack of confidence in 4Q ad spending at the TV network. If you add current 4Q EBITDA estimates to year-to-date reported EBITDA you get exactly to the mid point of management's guidance. What the street would have liked was an increase in the low end of guidance to suggest that results would ultimately settle in the top half. I understand that reading but I think it is overly bearish and that the company will reach the high end of its guidance.

For 3Q, CBS reported adjusted EPS of 25 cents against the consensus estimate of 25 cents. Revenues of $3.55 billion exceeded consensus of $3.2 billion. EBITDA of $597 million was ahead of the $538 million consensus. As noted, most of the upside was in syndicated TV sales.

Away from TV, radio showed margin stability which could be a good sign for 2010 if ad revenue declines slow. Outdoor showed little improvement. It was in line with estimates at 20% ad declines but following a better than expected report form competitor Lamar (LAMR), the segment's performance was viewed as disappointing. Interactive lagged at both the revenue and EBITDA lines but you would not know that form listening to the company which remains confident in its web strategy.

I remain bullish on CBS as a pure play on a cyclical ad recovery. The asset base ratings leading competitive positions, which means if a recovery occurs upside could be substantial. I think the shares could reach $15 in 2010 assuming estimates rise modestly toward the high end of current range. Obviously, that is my expectation of what will happen.

Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts.

Sold Half of CBS

On Monday, I sold half of Northlake's positions in CBS in each account that holds the stock. My reasoning is that the stock has risen 80% since purchasing it just 7 weeks ago. This spectacular rise caused CBS positions to approach 4% of equity portfolios. That is a high threshold for me, especially in a volatile stock.. At a 4% position, the lost performance if the stock took a hard hit would be meaningful. Given that my stretch upside target for the next 6 months is $15, not hugely higher, I wanted to capture some gain and reduce risk. The market has come a long way and an extra 2% cash position seems prudent.

CBS rose so sharply because 70% of its revenue is from advertising and advertising is highly sensitive to the economy. The market rally is partially based on the improving economic outlook so it is no surprise that traders flocked to CBS. Two other factors have helped CBS. Cash for Clunkers and the health care reform debate have led to an unexpected boost in advertising. In addition, CBS converted its ratings strength into a better than expected outcome in the upfront TV ad market.

If the economy is on track for recovery and growth in 2010, CBS can reach $15. I want clients to have some exposure to the possibility of a stronger than expected economic. CBS fits the bill.

Confident CBS Predicts Strong Second Half Recovery

CBS reported 8 cents on revenue of $3.01 billion against consensus of 7 cents and $3.05 billion. EBITDA of $387 million was at the top of end expectations and includes about $20 million of what could be considered one-time charges. Most importantly to the outlook for the stock, the company maintained 2009 EBITDA guidance. Many investors anticipated at least a lowering of the midpoint of the targeted EBITDA range. While the low end seems likely to be the final result, maintaining guidance is a win for CBS longs. The stock was trading up after hours, appropriately so in my opinion.

While CEO Les Moonves is always one to spin optimistically, his tone on the call was noticeably more positive than the rest of major TV companies that have reported. He noted ongoing improvement in pacing of ad sales at local radio and TV stations. He says that revenue on inventory sold in the upfront is flat vs. a year ago. He claims scatter advertising for 3Q is up sharply vs. a year ago with pricing above last year's upfront. More so than any other media executive, Moonves is pointing to positive signs in advertising.

CBS is a bit unique in that its TV content businesses (CBS Network and Showtime) are gaining viewers and ratings. This is helping the company gain market share of advertiser and consumer dollars. It is also creating a pipeline of content to be sold in other distribution channels. 2H09 syndicated TV sales will benefit.

CBS is also benefiting from tight operations. Operating expenses are falling and the financial team has done a good job refinancing the balance sheet and eliminating near-term liquidity risk.

Keeping in mind that only Les Moonves can excitedly talk about the collector's edition DVD of all six seasons of NCIS, the tone of the conference call was remarkably positive and confident.

CBS has tons of operating leverage. We saw it to the downside in 2Q. On an 11% revenue decline, EBITDA fell 50% and EPS dropped 84%. The bull case is that as the economy strengthens and advertising improves, operating leverage will reverse sharply to the good.

While there is no guarantee that the economy and advertisers will cooperate, investors can wait knowing that CBS is being well managed and its content is maintaining its viewer, listener, and browser base.

CBS is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts.

CBS: New Buy For Cyclical Upturn as Balance Sheet Concerns Ease

I purchased CBS for most Northlake clients on July 7th. The stock has pulled back by 33% off its recovery high leaving it at a point where I think the risk-reward tradeoff is favorable. I can easily construct a scenario where the stock moves from $6 to $9 assuming that advertising trends begin to improve and turn positive late this year or early in 2010. If I am wrong and advertising trends remain negative, I think downside is contained at $4.50 setting up $3 of upside against $1.50 of downside.

CBS is highly leveraged to the economy due to the fact that 70% of its revenue comes from advertising. TV is the largest business segment along with significant exposure to Radio and Outdoor Advertising. The purchase of CBS is consistent with my view that the economy has bottomed and will show sustained improvement later this year.

Obviously, the cyclical exposure adds risk to CBS. Other media conglomerates such as Time Warner, which I recently sold, receive 20-30% of their revenue from advertising. The reason why I am willing to take the added risk in CBS is that the company has effectively used the easing of credit conditions to refinance the balance sheet and eliminate near-term maturities. This should prevent the stock from revisiting its lows even if the economy and advertising fail to recover.

The upside in CBS comes from the fact that a recovery in revenues and operating margins creates substantial earnings power. Even if margins recover to a level well below the 2007/2008 peak, the stock will be trading at one of the lowest P-E multiples among major media stocks.

A final point in favor of CBS is that the CBS TV Network is coming off a very good season. CBS was the only broadcast network to maintain ratings. This leaves the company is good position for the late-breaking upfront ad sales market. I suspect that CBS may be able to limit its upfront price decline to low single digits, far better than ABC, NBC, or FOX. If ratings hold early next TV season, overall ad sales could end up flat or even up slightly once the balance of inventory is sold in the scatter market. This outlook is contingent on decent ratings and a better economy and advertising environment but that is the reason to own CBS.

Beyond the cyclical risks, CBS faces two other unique challenges. First, Sumner Redstone's control of the company creates corporate governance issues which are exacerbated by pressure on his personal finances. Second, the company has made a few expensive acquisitions to expand its online presence. I think CBS overpaid for CNET and LastFM but the problem is more investor perception than financial. CBS CEO Leslie Moonves is widely respected as perhaps the top executive in Hollywood providing comfort that the acquisitions are either going to work out better than expected or are just a misstep that will not be repeated.

CBS Misses But Optimistic on Second Half

CBS reported worse than expected 1Q09 results with EPS, revenue, and EBITDA each below estimates. However, Les Moonves spoke about improved advertising trends in the last few weeks and said "indications are we've seen the bottom of this downturn." These comments echo those from Disney (DIS) and News Corporation (NWSA) when they reported earlier this week.

The company provided full year guidance for EBITDA for the first time and the numbers are in line with analyst estimates. Given the very poor first quarter (just 14% of the mid-point of EBITDA guidance was produced) and commentary indicating that 2Q trends will not be much stronger, the implication is that current signs of improvement in advertising will kick in the second half. It is worth noting that CBS has one advantage on its peers: the CBS Network is having a good year with positive ratings and thus has something to sell advertisers.

The biggest weakness in the quarter relative to expectations was at Outdoor and Publishing. Outdoor has unusually weak margins, which was explained via the high fixed costs of the billboard business. Publishing saw EBITDA disappear. IT is not a big segment but the miss was enough to make a difference.

TV results are in line. 1Q does not really matter if ad trends turn up. CBS is disproportionately exposed to local TV advertising so commentary that there has been some improvement is hopeful. NWSA said the same thing.

Despite the weak results with revenue down 13% and EBITDA down 61%, the company still produced $204 million in free cash flow.

Management stated that they can self-fund debt maturities for the next three years including $1.2 billion in 2010, $950 million in 2011, and $825 million in 2012. The $3 billion bank line expires at the end of 2010. With free cash flow over $1 billion annually at what may be the bottom of the cycle, this is a reasonable assumption. However, management indicated that it would issue new debt and extend maturities if credit markets remain open over the next few months.

Refinancing of the debt, including a new bank line, is going to raise interest costs dramatically and hurt EPS and free cash flow. The shares will trade on the basis of free cash flow, EBITDA, and advertising trends. The outlook seems improved, especially if comments on ad trends are accurate. However, the stock is no longer super cheap at 7 times EBITDA.

I exit the quarter feeling better about CBS as a possible long but not at current prices.

CBS: Another Unimpressive Quarter

CBS shares popped nicely upward following its 1Q08 earnings report. Results exceeded analyst estimates and were accompanied by an 8% dividend boost. Despite the better than expected results, management only reiterated guidance. Either they are playing it conservative or they are implying that trends for the remainder of they ear may be a little below plan. The dividend increase suggests they are being conservative and the stock action indicates this is what investors believe.

Despite the positive reaction, I was not impressed by the results. EPS of 40 cents did beat consensus for 34 cents and flat revenue and 8% EBITDA growth were also better than expected. However, the source of the upside surprise was low quality. First, costs were lower, boosting free cash as well, due to the writer's strike. This was a commonly discussed topic during the strike but apparently analysts did not incorporate enough savings into their models. Second, syndication sales of CSI and Everybody Loves Raymond drove this division to an 85% revenue gain in a high margin business. CSI benefited form a shift form outside to inside distribution while Raymond sold a few more seasons. CSI may prove repeatable assuming analysts had not placed the distribution shift in their models. Raymond appears to be a timing issue with anticipated revenues being pulled forward.

Away from these positive surprises, trends were lackluster....

....Adjusting for CSI, Raymond, NCAA hoops, and the Super Bowl, total TV revenue was up just 1%. TV station revenues fell by upper single digits reflecting weakness seen at other TV station groups which have already reported. TV Network revenue was probably barley negative after adjustments for sports. Radio remains awful with same station revenue falling 6% and EBITDA down 20% as content related expenses rise.

One other problem may be emerging in the company's only growth business with a material financial impact. Outdoor had just 7% revenue growth with the US coming in at just 3%. EBITDA was up just 1%. International likely slowed to single digit growth excluding foreign currency benefits. Management cited some lost contracts in the US as the culprit but other outdoor companies have also witnessed a sharp slowing from double digit growth. It seems that the traditional media advertising slump may have finally reached billboards.

CBS shares are inexpensive on a P-E, EBITDA, and free cash flow basis and sport a 4.7% current yield. I don’t much downside from here. CBS has fewer growth prospects than other diversified media companies so it deserves to trade cheap. Furthermore, I remain concerned that the several hundred million dollar profit stream at the CBS Network could disappear quickly given past precedent when the top ranked network fell off its perch. CBS ratings trends are the worst among the big four broadcast networks.

CBS 1Q07 Earnings: I Am Still A Seller

CBS (CBS) 1Q07 results were in line with estimates. EPS of 33 cents matched the consensus while revenues very slightly exceeded consensus. EBITDA fell a little short as margins at the TV segment were lower than expected despite better than expected revenue.

I think the quarter will have little near-term impact on CBS shares. The results provide something for the bulls and the bears. CBS remains in a position where operations are growing very slowly as the company supports the stock price with changes to the capital structure. The idea is to use capital structure to transition the company to a higher growth phase where digital initiatives are large enough and profitable enough to drive moderate growth.

Bulls think there is a lot of value that can be surfaced via capital structure changes because the sum of the parts is greater than the valuation presently accorded the company. Bears think that growth in financially dominant TV assets is at risk near-term due to ratings and long-term due to technology challenges. If growth is at risk, aggressively leveraging the balance sheet and creating fixed cash flow requirements via interest expense and higher quarterly dividends is not a good long-term strategy. I stand with the bears with my concerns being more short-term in nature as I fear a significant decline in profits at the CBS TV Network may be coming due to ratings issues especially on the Thursday night.

At the segment level, excluding the benefit of the Super Bowl and the timing of the NCAA basketball tournament, it appears that revenues would be down mid-single digits. EBITDA came in under expectations which supports this analysis. If accurate, it suggest that despite lots of talk from management about the Network, the ratings performance is beginning to take a toll. 2Q will be a good test. Comments surrounding the upfront and current scatter market conditions were very bullish suggesting management has confidence. On the other hand, Les Moonves indicated that CBS might be making some big changes to its primetime schedule. This suggests that the ratings might be of more concern to management than they admit....

Radio revenue fell 4% adjusted for station divestitures. This was a little short of estimates but EBITDA matched expectations implying good expense control. The radio results won’t have much impact on the stock.

Outdoor results matched expectations with revenues up 2% and EBITDA flat. The loss of transit contracts in NY and Chicago and the pickup fo transit in London distorted the results and covered up stronger underlying trends. In North America, EBITDA was up 16% while international EBITDA fell 63%. If the Londodn contract proves profitable, unlike the lost NY and Chicago contracts, Outdoor is poised for upper single digit growth at least.

Pubslishing results were much better than expected and made up for the shortfall in TV EBITDA allowing corporate EBITDA to match expectations.

Free cash flow was better than expected but the driver was working capital as operating profits were in line with estimates. The sustainability of these gains is open to debate.

CBS: Lack of Growth Offsets Cheap Value and Financial Strength

CBS Corporation (CBS) reported 3Q EPS that mostly matched street expectations. EPS of 42 cents were 2 cents above consensus but revenues of $3.38 billion fell about $50 million short of estimates. EBITDA results were favorable, up 3%, a little ahead of expectations for a 1% gain.

With revenues short of expectations and EBITDA above, the story in the quarter was good expense control. This appears to be the case particularly in the TV segment where a 9% EBITDA gain was achieved on flat sales that were under expectations for a 1% gain. Lower than expected programming expenses were cited in the press release. EBITDA in Radio was down 10% on a 6% revenue decline. Outdoor performed well with revenues rising 6% and EBITDA rising 20%....

Within the TV segment, syndication, political advertising, and affiliate fees all grew mid to upper single digits. However, advertising growth was -3%. Management attributed the advertising decline to the closing of UPN and the lack of the Emmy Awards show this year. However, a couple of analysts, most notably Anthony Noto of Goldman Sachs, pressured management to amplify on the weaker advertising trends, especially in light of some weakness in CBS' primetime schedule. I was pleased to see this interaction. Les Moonves has proven himself as a great media executive but he has a tendency to look at the bright side of everything. I remain concerned that the CBS Network has peaked and at best will offer no growth over the next few years. The TV segment is by far the company's largest and lack of growth in the segment will severely limit the company's overall growth rate.

Radios aw nothing unusual. Weak industry trends plus the impact of Howard Stern's departure continue to pressure results. Comparisons ease next year and management noted that the non-Howard Stern stations had a 1% advertising gain in the quarter, which would be better than industry growth.

Outdoor continues to benefit from industry trends and margin expansion as high cost transit contracts roll off. The big gain in EBITDA was also helped by easy comparisons against last year's hurricane impacted quarter. Margin expansion will slow or cease in 2007 bringing EBITDA growth in line with revenue trends.

CBS is slightly cheaper than most other media stocks but I think the lack of growth potential in operations supports the discount. 2007 should see TV trends remain flattish, a recovery in Radio, and moderating Outdoor growth. Overall, the outlook is for low single digit growth in revenue, EBITDA, and operating income.

For me, that is not enough to justify owning the stock even with high free cash flow generation, a steadily rising dividend, renewed share repurchases, and over $3 billion in cash on the balance sheet. I believe that 2006 performance across the media secotr shows that investors will only bid up large cap stocks that are showing growth (DIS, NWS, CMCSA). CBS has one of the worst growth profiles which limits upside in the shares despite financial strength.

CBS: Cheap But No Momentum

CBS Corporation (CBS) reported 2Q06 results very close to expectations and reaffirmed guidance for 2006. Nevertheless, the shares are dropping sharply. I think there could be two reasons for the decline. First, the company did not indicate how it was going to use proceeds of recent asset sales. Investors were expecting a big increase the share buyback. In fact, management noted on the call that under certain deal structures future sales of radio stations might prevent the company from buying back stock while during the period form announcement of the sale to closing. Second, advertising revenue growth at the TV stations, in particular, the CBS Network, were weak in the quarter, falling in the very low single digits. This is probably less of a short-term factor although in the long-term the health of Network is critical to the stock....

CBS reported adjusted EPS of 50 cents, exactly matching consensus. Revenues were a little light but I don’t see that as material. EBITDA fell about 4% after adjusting for accounting for the sale of Paramount Parks, also exactly in line with consensus.

Trends at the segment level also closely matched consensus estimates. TV revenues were flat with a small decline in EBITDA. TV faced a tough comparison due to DVD sales a year ago. Radio continues to feel the pressure of poor industry trends and the loss of Howard Stern. Radio saw a revenue decline of 8% with EBITDA dropping by 19%. These results light have been a little worse than some analysts were expecting. Outdoor remains the star producing an 8% revenue gain and a jump of over 30% in operating income.

In non-financial commentary on the call, management talked extensively aobut how muchinterest they are receiving int eh radio stations that are up for sale. Expect to see announcements soon but beware of deal structure given the comments that it could impact the timing of share buybacks. There were also questions about ad trends at the CBS Network. In my opinion, ad revenues were below expectations. Given my concerns that have ratings and profitability at the CBS Network have reached a plateau this is troubling news, especially for the long-term. Management stated that further acquisitions would be on the small side and continued to discuss their intent to produce a half dozen movies a year. Finally, free cash flow was again very strong in 2Q and 1H FCF looks like it is tracking way ahead of analyst estimates. Management cautioned that 2H cash flow is generally seasonally weaker as costs for key sports programming and production cost for the fall TV season kick in.

Overall, 2Q confirmed my belief that CBS is cheap for a reason: lack of identifiable growth. I still feel that risk remains to the downside in terms of financial performance which more than offsets likely share repurchase and asset sale announcements.

Solid Quarter From CBS

CBS (CBS) reported better than expected 1Q06 earnings. The shares are not responding indicating that strength in the stock over the last few days anticipated the results. Also, CBS did not raise its 2006 guidance from "low single digit revenue growth and mid-single digit growth in operating income and EPS." Given the better than expected 1Q results this implies that some portion of the outperformance is not sustainable through 2006. I suspect management wants to see the results of the upfront and the impact of recent changes in radio personalities before it would adjust its guidance.

CBS reported EPS of 30 cents against consensus of 27-28 cents. Revenues came in at $3.58 billion against estimates surrounding $3.5 billion. Television and Parks/Publishing beat on revenues, while EBITDA was better than expected at Parks/Publishing and Outdoor. Profitability at Outdoor was the star of the quarter and seems to have accounted for the bulk of the EPS surprise.

Radio did poorly as expected due to weak industry trends exacerbated by the loss of Howard Stern. Management noted that non-Howard stations saw revenue declines of 1.5% against a decline of more than 5% for the fully station group....

Analysts were impressed by better than expected free cash flow and queried whether this trend was sustainable and what the company planned to do with its free cash flow. Parks and some radio stations are for sale so the balance sheet is going to be underleveraged by year end. Lower taxes appeared to play apart in the free cash flow surprise as did the positive surprise at the EBITDA level. Management said a dividend increase is in the works and that share buybacks are strong possibility. A large acquisition, specifically Univision (UVN) was ruled out but smaller deals are definitely a possibility.

One concern I have is whether the CBS Network can show hold its recent gains in revneu and operating profit. Revenue in Television in 1Q surprised to the upside with syndication of Frasier, affiliate compensation, and TV stations being credited. This implies a weak quarter at the Network. This was anticipated due to competition from the Olympics. Management said that 2Q trends were bouncing back as expected. The health of this year's upfront will be key to the outlook for the network. I expect CBS can hold its own but growth will be hard to come by from the network with ABC and FOX on the rise and NBC unlikely to get any worse.

CBS shares are trading at a discount to other entertainment stocks. I think CBS has a lower growth profile so I believe the discount is warranted. Free cash flow is a positive but I think growth concerns will win out limiting the upside in the shares.

CBS Earnings Preview: 1Q 2006

Since their debut at the beginning of January, CBS (CBS) shares have generally trended lower due to concerns over the company's long-term growth rate and how it intends to use its cash flow. Ahead of its 1Q06 earnings report tomorrow morning, the shares are trading at 15 times 2006 estimated EPS and less than 8 times EBITDA. Most analysts like the shares.

The consensus EPS estimate for 1Q is 27 cents on revenues of $3.53 billion. Tv, the company's largest business at about 65% of revenues is projected to show revenue and EBITDA growth in the low double digits. Outdoor, aobut 14% of revenue, is projected to be the growth star with revenues up 5% or more and EBITDA rising 15%. Radio, also about 14% of revenues, is the problem child. Due to the loss of Howard Stern and the malaise throughout the industry, revenue is projected to fall about 5% with EBITDA falling 12%....

Based on current analyst estimates, 1Q will mark the low point for revenue and EBITDA growth in 2006. Growth should accelerate over the balance of the year with mid-single digit top line and slightly higher EBITDA growth projected.

The big questions for CBS are what is the long-term growth rate and how will it be achieved. Bullish analysts feel that small acquisitions, the addition of retransmission dollars from cable companies, monetizing new distribution channels, and share repurchase and dividends can drive top line growth and gains in the share price. On the other hand, if growth remains in the low single digits, further multiple contraction seems in order.

On the conference call, analysts will ask about a potential bid for Univision (UVN), the transition of UPN to the CW network, use of free cash flow including share repurchases, dividends, and acquisitions, and the status of retransmission payment negotiations.

Management will strongly defend their business and do so competently. Les Moonves and Fred Reynolds are a top quality team and their ability to manage the business well and get the stock price moving should be respected.

I am not sure where I come down on CBS. I don’t own the stock but I limit my individual stock holdings severely in my ETF centric strategy so my hurdle rate is high. If I had to chose, I'd go against conventional wisdom and say the shares will underperform. I can see how some of the revenue opportunities will work out but I think the CBS Network is probably at its high point and the risk is too downside. Any weakening at the network would punish the financials due to the operating leverage in that business. As of now, there is no sign the network will weaken, although growth above current levels is not expected either. I also see radio in a long-term state of decline. These risks outweigh the upside opportunities the strong management team is likely to secure.

As a caveat, I think that if media stocks came back in favor in 2006, CBS would probably be a leader given its support from the sell side and accelerating growth profile through the year.