Description

CBS’s value presents a 50% gain than its trading price with minimal downside risk. Largely because of more interest in its much more glamorous sibling Viacom in the most recent spin-off, uncertainties facing the broadcast tv and radio industry, CBS’s allegedly “no-growth” stock but basket of attractive businesses (40+% Return on deployed Capital) is trading at an attractive valuation at a little over 10 times EBITDA Less Capex, 7 times next year’s cash flow, and you also get a 2 percent dividend yield. Furthermore, on a comparable basis, even if you adjust for the parks/publishing segment which deserves a lower multiple, you are still getting this basket of business at less than 8 times EBITDA Multiple when each of this business segments, (radio, tv, or outdoor) trade at 10-13 times EBITDA Multiple.


CBS owns 4 business segments: Television, Radio, Outdoor and Parks/Publishing.

The Television segment consists of the Broadcast Networks (CBS and UPN television networks), Showtime Networks (Showtime, The Movie Channel, FLIX), 39 owned television stations, and the television production and syndication business called CBS Paramount Television and King World Productions. On the aggregate, this business generated EBITDA margins of 18-19% under the umbrella of Viacom. The Paramount Network has not been making money for CBS but this should become profitable starting fall of this year. On November 3, 2005, CBS acquired CSTV Networks (College Sports TV) for 10.21 million shares of CBS Class B common stock. http://www.cbscorporation.com/news/prdetails.php?id=142
In January 2006, CBS announced a joint venture with Warner Brothers to form a new fifth network, called the CW Network. This combined network will have access to 48% of the households and through affiliation deals, could reach 95% of the country by its scheduled September launch.
http://www.cbscorporation.com/news/prdetails.php?id=173
I think this segment is where the market is missing the potential growth. I think they can increase their operating margins by 8 to 10 percentage points over the next few years. On a 10-11 billion revenue base this translates to another billion or more of value. See management on where the growth in TV segment can come from.
Comparables in this space trade at 12.5 to 17 times EV/EBITDA multiples. They include EW Scripss, Hearts-Argyle, Univision, Entravision. The higher growthy names like the Hispanic stations trade at the higher end multiples.

The Radio segment owns and operates 178 radio stations in 40 U.S. markets trough CBS Radio. This business generated EBITDA margins in the 48%+ in the pre-spinoff era. This segment of the business faces the highest uncertainty risk at the moment. It lost the Howard Stern show to Sirius satellite. It faces competition from Ipod, Satellite radio among many other headwinds. In response, CBS is trying to find a replacement for Howard Stern and has announced deals to carry Cramer’s “Money Show”, among others.
Comparables in this space trade at 12 to 14 times EBITDA multiples. They include Clear Channel, Cox Radio, Citadel Broadcasting, Cumulus Media, Radio One.

The Outdoor segment displays advertising on billboards, transit shelters, busess, rail systems (in-car, station platforms and terminals), mall kiosks and stadium signage. This business generated 25% EBITDA margins in the pre-spinoff era. By far, this business arguably faces the least amount of well-known uncertainties. Comparables such as Lamar, Clear Channel trade at 13 to 13 times EBITDA Multiples.


The Parks/Publishing segment includes Simon&Schuster, which publishes and distributes consumer books (Simon & Schuster, Pocket Books, Scribner, The Free Pres) and Paramount Parks, which operates 5 themed parks in the U.S. and Canada with 12.5 million guests annually. CBS says there are many interested parties in its parks operations and it expects to complete its announced intended divestiture of Paramount Parks division in the second half of 2006. http://www.cbscorporation.com/news/prdetails.php?id=175
This segment represents less than 10 percent of revenues and less than 5 percent of EBITDA.

On January 5, 2006, CBS acquired CSTV Networks (College Sports TV) for 10.21 million shares of CBS Class B. CSTV reaches about 15 million cable and direct-broadcast satellite households, having distribution agreements with Comcast, DirecTV, Time Warner, Charter, Cox and EchoStar’s DISH Network. The web site, www.CSTV.com, has more than 7.5 million monthly unique visitors as of September 2005. CSTV’s founders were the founders of Classic Sports Network which was bought by ESPN for $200+ Million dollars back in 1997. Combined, CBS Sports’ online audience will have 19 million unique users, more than any other online medium.

Attractive Economics

While not as good as in the past, the economics of the radio, tv and the outdoor segments are still very attractive. Maintenance capex is minimal and total capex averages 12-15% of sales. about On the whole including the parks/publishing and the outdoor segments, these businesses return 40+% EBIT on capital (net fixed assets + working capital). If the divestiture of the themed park business is completed, the returns should be higher.

Unrecognized growth opportunities
Less well recognized are the potential growth opportunities: high-tech displays (LCD’s,etc) for billboard space, targeting internet audience with CSTV and live simulcasts on TV and internet such as the NCAA March Madness, CBS deals to sell CSI episodes on the internet and over Ipod, Cramer’s money show will be carried on CBS Radio Stations, etc. The media pie continues to grow 6 to 8% over the next three years. If anything, political advertising should cause a spike in ad revenues in 2008.

Management
Les Moonves's team has a very good reputation as a passionate programming executive. You have the talent, the incentive, and the chemisty. This is a team that has worked together for many years. The founders of Classic Sports who are joining CBS are also very well regarded. Les Moonves took CBS’s TV to the #1 spot in prime time ratings and #1 in profitability and has been in this business for many years. The next target is the CBS’ news business. Sean McManus, who led the resurgence of CBS Sports, is now running the news group. Les is also focused on making Showtime more profitable. Showtime was not the focus of Viacom in the past. Finally, Les is aiming for a per-subscriber, per-month fee from cable operators to retransmit the CBS signal in their systems. If CBS can get only 20 to 40 cents per sub, this would translate into 175 to 350 million annually in incremental profits. In the few weeks that CBS has been independent, Les has made a few promising moves such as the announcement to divest the parks, the joint venture deal with Time Warner for the CW Network, the carrying of the Money Show on the Radio Stations. In other words, Les is not standing pat. You are getting this unrecognized growth for free in my opinion. To get a subjective opinion of management, click on this link.
http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=99462&eventID=1198287




EBITDA EST REV ESTIMATE MARGINS
My EBITDA Estimates: 2006E 2007E 2006E 2007E
Television Segment* 1980M 2240M 9750M 10200M ~20-22%
Radio 920M 930M 2000M 2100M ~44-46%
Outdoor 510M 540M 1900M 2000M ~26-27%
Parks&Publishing** 120M 123M 1200M 1230M ~10%
Corporate -230M -260M
Consolidated EBITDA 3,300M 3,573M

(* Breakdown of Television Segment
2006E 2007E
Broadcast Networks 485M 580M
Television Stations 820M 850M
TV Production&Syndication 380M 400M
Showtime Cable TV Network 350M 370M
CSTV Cable TV and web sites 0 25M )

(** Assumption is that the Parks do not get sold, but CBS announced they are planning to get sold. I assume a 6 times multiple in this analysis and I think this multiple provides margin of safety because the parks will probably sold for equal or higher multiple)

Valuations:

You are currently paying for around 7.7 times 2006 EBITDA, 7 times 2007 EBITDA. Equivalently you are getting a yield of around 9.5% on EBITDA less Maintenance Capex. This business generates returns on capital (net fixed asset + net working capital) in the 40 percent range, after CBS sells its themed parks. I believe that this valuation gap of a 50 percent increase (to 39$ a share) could be closed within 12 months as any of the catalysts mentioned below start coming to fruition. At worst, as Dec. 31 2006 comes closer, and people look out a year from then, the chances of this valuation gap closing gets higher. To get to this 39$ price, I assume matrix values of multiples of 2007 EBITDA of 10x, 9x, 12x, 6x for the Television, Radio, Outdoor, and Parks/Publishing Segment respectively.

Risks
The nature of TV ratings is that CBS’s sustainability in the #1 spot is not guaranteed.
If I am wrong about the management’s ability to execute, then the upside is not there, but even so, it would be highly unlikely that you will lose money at this stock price.

Catalyst

Quarterly results are reported
Sale of non-core assets such as themed parks in the 2nd half or earlier
Further rationalization of the business
Incentivized management who get to execute what they knew all along needed to be done while operating under the Viacom umbrella for the last 5 plus years
Dividend hike
Share buybacks one year out