Analysts ponder CBS


After digesting the Q3 report from CBS Corporation, a couple of analysts are out with notes to clients that the company’s dividend appears to be intact for the time being. But with ad revenues under pressure, neither is getting excited about the stock as an investment, despite the 12% yield.

Q3 was mixed, noted Marci Ryvicker at Wachovia Capital Markets, with the CBS Network doing better than expected, but local ad sales suffering for radio, the TV O&Os and outdoor.

“The network business in general has taken a lot of heat in the past few years given the DVR explosion and increased competition. CBS is holding its own – ranked as the No. 1 network among all demographics (first time in 20 years) for the first 5 weeks of the season, and has experienced fewer upfront cancellations and make-goods. While the scatter market is not booming, pricing is still above upfront levels and CBS is taking share,” Ryvicker wrote.

The analyst is sticking with her target price of $10-12 for the shares and “market perform” rating. The risks to that valuation, she said, were that the network could fail to keep its ratings up and that the company would not be able to sell the radio stations it currently has on the market.

In his conference call, CBS Corp. CEO Les Moonves talked about negotiations now under way with major cable MSOs in which CBS expects to reach deals to get cash payments for retransmission consent agreements with its O&O stations. Analyst Anthony DiClemente at Barclays Capital is a bit skeptical.

“In our view, CBS needs cash retransmission consent fees from the cable operators in exchange for its valuable content to buttress its advertising dependency. Perhaps independence is not necessarily the most efficient way for CBS to pursue retransmission consent fees,” DiClemente told clients.

Before they were split into two companies, CBS Television and Viacom’s cable networks bargained together with the cable MSOs over carriage rights. The cable companies pretended that they were refusing to pay for broadcast television, but in fact the O&Os were part of the equation. CBS Corporation continues to receive some of the payments from the cable MSOs under the deal cut when it split off Viacom, but now it has to bargain alone as those cable contracts come up for renewal.

So, what’s happening with the retrans talks?

“Given the declines in the advertising environment, we continue to believe it is increasingly important for CBS to garner a second revenue stream for the CBS network. We currently believe that CBS is in negotiations with Cablevision that are expected to reach a resolution by the end of 2008. We believe negotiations with Time Warner Cable and Comcast will begin in earnest in 2009. In terms of recent transactions and/or evidence of retransmission consent precedent, Time Warner Cable recently came to an agreement with LIN TV, which has stations in 11 TWC markets, representing roughly 1.5 million TWC subscribers. While the negotiations were protracted and resulted in LIN TV removing its broadcasts from TWC carriage temporarily, we believe the two parties came to an agreement as to the fair market value of the LIN TV content,” DiClemente said.

“Currently, CBS O&O stations reach 39% of total U.S. television households, representing 44.3 million homes. In a bullish scenario, if CBS is able to generate monthly affiliate fees of $0.50 per ‘subscriber’ household, this could equate to roughly $265 million in incremental annual revenue. We believe the margins on these retransmission fees are likely to be as high as 90%, which would represent roughly $240 million in incremental annual OIBDA. With retransmission consent fees of $0.50/subscriber/month, upside equates to about 2% of 2009E CBS revenues and about 9% of 2009 OIBDA,” he wrote. But that is the bullish scenario.

And while waiting for that new cash to come in, ad revenues are hurting. Thus CBS posted OIBDA declines of 15% for TV, 18% for radio and 26% for outdoor in Q3, the analyst noted. Full year guidance for a mid-teens decline in OIBDA, DiClemente calculates, means Q4 declines in the neighborhood of 30%. “There is little reason to believe those types of declines will not continue into the first half of 2009,” he added.