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Even after $9 billion loss, CBS is a buy
The broadcaster, fresh from its spinoff from Viacom, works fast to get troubles behind it and recognize new opportunities.
By Robert Walberg
If you cant wow em, confuse em. That seemed to be the approach CBS (CBS, news, msgs) took in its first earnings report since spinning off from Viacom (VIA, news, msgs) on Jan. 1.
Here is CBS's report in a nutshell: It wasn't a stand-alone company last year, but CBS reported results as if it were. The value of its radio and broadcast units have dropped by $9.5 billion since Viacom bought them back in 2000. But if you can ignore that (and some smaller problems that shouldn't repeat themselves) the company actually posted a profit of 41 cents a share.
Is it any wonder that investors were left scratching their heads? Heck, even CSIs Gil Grissom would have a tough time piecing together all the evidence. But don't get discouraged. I'll help show why CBS's shares are due for a rise of 20% or more.
The biggest loss: Howard Stern
In reality, CBSs report makes some sense. Basically, management wanted, as quickly as possible, to write down the value lost by its core radio and TV units, which clearly have declined in value with the growth of Internet advertising and satellite radio. That explains the ugly loss of $9.14 billion, or $6 a share. It also explains why investors, who knew the write-down would come at some point, shrugged off the number.
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More significant than the headline loss were the quarterly revenue results for each of the companys core units. On this front, the results were more encouraging. Bolstered jumps in ad sales on TV and outdoor advertising sales, total revenues for the quarter rose by 2% to $3.83 billion. Gains in these areas offset a slight dip in radio revenue -- though investors were encouraged by the fact that CBSs radio business outperformed the industry averages in what was a difficult environment.
Of course, the outlook for CBS radio isnt very bright in 2006, given Howard Stern's switch to Sirius Satellite Radio (SIRI, news, msgs). Advertisers, once attracted to Sterns sizeable ratings, will likely consider alternatives to CBS -- a move that could make for some ugly first half comparisons.
Big plans; new partners
But in sharp contrast to the confusion surrounding yesterdays numbers, CEO Les Moonves has mapped out a clear vision of CBSs future. The company will jettison some businesses, including its theme park unit, and focus on new ways to maximize the value of its remaining media assets.
A few recent moves that should bode well for the company include the acquisition of College Sports Television Networks; the formation of the CW television network, aimed at the key 18-35 demographic; and the decision to make some of its top-rated content available for download on Google (GOOG, news, msgs).
Though Moonves dismissed speculation that CBS would make a run for Spanish-language broadcaster Univision Communications (UVN, news, msgs), he made it clear that the company will continue to take bold steps to shed its image of a slow-growing old-media firm.
How the company plans to move to the forefront of content creation and distribution in the changing entertainment landscape was less clear, though acquisitions will play a key role. Two companies that might make interesting choices, given CBSs desire to expand its footprint in new-media, are RealNetworks (RNWK, news, msgs) and Audible (ADBL, news, msgs).
Finding partners isnt the only way management can enhance shareholder value. Since the split with Viacom, CBS has taken advantage of a 10% year-over-year jump in free cash flow to increase its dividend by 14%.
CBS expects to deliver low single-digit revenue and mid single-digit earnings growth this fiscal year. Combine that with strong cash-flow generation, a decent dividend yield and relatively low stock price, and the long-term outlook for the stock is promising. A break above $27.50 would position the stock for a 12- to 18-month run to above $30.
At the time of publication, Robert Walberg did not own or control shares of any companies mentioned in this column.
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