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CBS Gets Ready for Prime Time

31 January 2013

(Barron’s)

Not only does the REIT move give CBS a potential one-time boost to earnings of 10%, “as the shares become less cyclical they deserve a higher multiple,” says Scott Harrison, a senior analyst at Argent Capital.

January 26, 2013  (Robin Goldwyn Blumenthal)

In its effort to become more of a pure-play content company, CBS just announced a clever, and lucrative, step. The New York-based media giant is spinning off its outdoor-advertising business—which CEO Leslie Moonves told Barron’s last June he’d be willing to sell for the right price—into a real-estate investment trust.

In so doing, CBS (ticker: CBS) has accomplished what few thought it could—elicited a price tag of as much as $6 billion for the billboard business, just the dollar amount Moonves kept insisting (despite many protestations) it was worth.

More to the point, the move has garnered renewed appreciation for the admirable job Moonves and his team have been doing to refashion the $27 billion (market value) company, and lessen its reliance on revenue from economically sensitive advertising sales. Only the Americas billboard business will be in the REIT; CBS hopes to sell outright its counterparts in Europe and Asia. In total, that will reduce advertising’s contribution to 50% from 60% of 2013’s estimated revenue of $14.8 billion, prior to the REIT conversion, which CBS expects to complete in 2014.

The REIT idea was a hit. CBS shares have jumped 11% since the mid-month announcement, to a recent $42, near their 52-week high and right where Barron’s said they’d be by mid-2013 when we last looked at the company (“CBS’s Star Turn,” June 11, 2012). That was the second time in 18 months we expressed partiality to the CBS story, and the plot line hasn’t disappointed. Since we first recommended CBS in June 2011, the stock has soared 63%, trouncing the 18% rise of the Standard & Poor’s 500 index over the same span.

Not only does the REIT move give CBS a potential one-time boost to earnings of 10%, “as the shares become less cyclical they deserve a higher multiple,” says Scott Harrison, a senior analyst at Argent Capital. CBS now fetches a multiple of about 14 times forward 12-month earnings estimates of $2.91 a share. If CBS were to achieve the 16 multiple accorded to the lower-end of pure-play content producers such as Scripps Networks Interactive (SNI), its shares would rise another 12%, to around $47.

But Harrison notes that CBS has been able to command ever-higher prices in periodic negotiations with distributors such as cable and satellite firms, streaming video services such as Netflix (NFLX), and local TV stations and nonaffiliates.

That programming, including adaptation for a summer miniseries of Under the Dome, a Stephen King novel published by CBS’s Simon & Schuster unit, and the broadcast of the Super Bowl in early February, gives Harrison confidence CBS shares can go 30% higher, hitting the mid-50s in the next 12 months.

CEO Moonves is also pumped up by the programming lineup. “The Super Bowl has become a national holiday,” he tells Barron’s. Already, advertising for the most-watched event on television has “gone through the roof,” says Moonves, with a few 30-second spots exceeding $4 million and an average cost of about $3.8 million for a 30-second spot.

Moonves also notes that ratings for the CBS network, which got off to a slow start in the fall, are recapturing “first place across the board in every demographic.” Moonves says he feels “very good about the rest of the year.” Investors should feel good, too.