Reassessing prospects for CBS


Barclays Capital analyst Anthony DiClemente has been reworking his numbers for CBS Corporation. Citing the company’s exposure to “deteriorating TV advertising trends,” he’s cut his outlook for 2009 and worries that if 2010 is also a down year, CBS Corp’s dividend could be at risk. The latest reduction in Barclays’ revenue and earnings forecasts are driven mainly by television, but the research report notes that radio revenue declines are accelerating and deteriorating trends for outdoor “bode poorly for 2009.” CBS is viewed as the most advertising-dependent of the large-cap media stocks.

“Simply put, like any other business, television’s advertising dollars are driven by supply and demand: Supply of advertising inventory is down across the TV networks as viewers continue to shift ‘up the dial’ to cable networks. And given the challenging economic environment, demand for that advertising inventory continues to soften as well (and this at a faster underlying rate than supply is being reduced, meaning that spot pricing increases for TV advertisements are no longer offsetting the impact of inventory/ unit declines in ratings). Of course, key advertising category culprits remain 1) Automotive (12.3% of total advertising); 2) Financial services (6.2% of total ads); 3) Real Estate (1.8% of total); and of late 4) Retail (12.4% of total), all to varying and debatable degrees. We are anticipating that deteriorating trends in the television marketplace are driven by further continued weakness at the local television stations; CBS and Fox are the top two TV station groups in the country. We believe difficult 2009E comparables with the 2008 political spend also pose a problem for models forecasting a 2H09 recovery. Forecasting margins remains the most challenging aspect of the CBS model, as the rate of expense declines in 2009 and 2010 remains uncertain. Cost cuts and restructurings at CBS include 1) combining operations for owned & operated CBS TV stations, 2) cutting news bureaus at the CBS network, and 3) more judicious production spending. Because network TV is such a fixed cost business, further downside to margins is possible if cost cuts and layoffs do not continue to mitigate revenue losses. Our 2009E CBS revenue estimate is $13.1B; every $100M of EBITDA lost equates to roughly $0.10 of EPS. Somewhat paradoxically, because TV station operators such as CBS itself continue to cut costs across the board, end-market demand for syndicated scripted TV programming is likely to experience weakness going forward, in our view. CBS’s syndication pipeline for 4Q08E and 2009E includes Numbers, Criminal Minds, Ghost Whisperer, Everybody Hates Chris, and Medium. Fortunately, we believe all titles except for Numbers have already been securely pre-sold,” wrote DiClemente, along with associate George Hawkey.

The news is not all bad on the television front. The analysts note that they are putting retransmission consent revenues into their modeling to partially offset the advertising decline. They are looking for CBS to claim $50 million of retrans fees in 2009 – but that only partially counterbalances a $750 million decline in ad revenues.

In radio, Barclays is projecting that industry revenues will decline 18% in Q4 and the analysts note that CBS Radio has been trailing the industry by 200-250 basis points. So, they are forecasting that CBS Radio revenues will decline 20% for the quarter on a same station basis. They are modeling a 14.3% decline in 2009 for CBS Radio, while the radio industry is expected to be down 13%.

Meanwhile, the once bullet-proof outdoor industry is also hurting. DiClemente’s report forecasts that CBS Outdoor revenues will be down 9.6% in Q4. The outdoor industry is forecast by Barclays to be down 6% in 2009 and the analysts are expecting CBS Outdoor to be down 7%.

What about that quarterly dividend of 27 cents, or $1.08 per year? The analysts note that the options market is already pricing a dividend cut as likely. They see that as a possibility if there is no recovery for CBS in 2010. Barclays retains its “underweight” rating on the stock and target price of $8.00.

RBR/TVBR observation:
Les Moonves has indicated that CBS management will fight hard to defend that hefty dividend. Since the split with Viacom, the strong cash flow production and the dividend it makes possible have been touted as the reason to own the “old media” stock. The problem, as DiClemente notes, is that CBS is now paying out over half of its free cash flow to shareholders, pushing just over the benchmark to 52% in 2008 – and ballooning up above 70% the next two years. Now, if 2009 truly is the trough year for CBS, then the dividend payout should be safe. But the Barclays analyst isn’t convinced that CBS is going to enjoy a sharp rebound in 2010. If, as he expects, it is a flattish year, then the projected 72% payout of free cash flow in 2009 rises to 74% in 2010 and puts pressure on management to reduce the dividend an hold onto more cash in the company coffers.