Of late, CBS Corporation CBS has been struggling to perform. The share price of this media giant has dropped 15.4% year to date. The plunge in the stock’s price is enough to put an ardent investor on the back foot. So what has gone wrong with the company? And more pertinently, is the stock devoid of any catalyst in the near term? Let’s find out.
Top Line Performance a Worry
A look at CBS Corp.’s top-line performance unveils that the company has posted lower-than-expected revenues in five of the last seven quarters. Over the trailing seven quarters, revenues have fallen short of the Zacks Consensus Estimate by an average of 0.7%.
In the third quarter, total revenue fell 3.3% to $3,257 million and missed the Zacks Consensus Estimate of $3,274 million. This marked the company’s third consecutive quarter of revenue miss in 2015. The top line was negatively impacted by the timing of television licensing sales, non-renewal of the sports contracts and a fall in pay-per view revenues.
Advertising remains a significant source of revenue for the company. In the third quarter, advertising revenues fell 4.3% to $1,481 million. Through the first nine months of 2015, the company generated $4,859 million in advertising revenues compared with $5,057 million earned in the first nine months of 2014. A change in the macroeconomic backdrop has the potential to severely impact advertising revenues, and in turn, affect the company’s overall performance. Moreover, overall broadcasting advertising trends remain challenging.
Hidden Gems
However, things are not all that gloomy. We note that despite a soft top line, CBS Corp.’s bottom line has surpassed the Zacks Consensus Estimate in nine of the past eleven quarters. In the third quarter of 2015, the company reported earnings per share of 88 cents that beat the Zacks Consensus Estimate of 81 cents on the back of strength witnessed across affiliates and subscription fees. The bottom line also benefited from robust share repurchase activity that helped register 18.9% growth from 74 cents per share earned in the year-ago quarter.
CBS Corp.’s sustained focus on increasing subscription-based revenue is a long-term growth driver. The company has an extensive library of premium content that it will be monetizing over multiple platforms through the next few quarters. Moreover, in keeping with customer demand, last year, the company launched two over-the-top services, namely CBS All Access and CBSN. It also launched an independent streaming service for its premier channel Showtime that is also available on Apple, Roku, Hulu, and Sony PlayStation.
Management remains confident of its Retransmission revenues surpassing the $2 billion mark much before the targeted deadline of 2020 and exceeding $1 billion by 2016, a year ahead of expectations. Several strategic deals with Sinclair, AT&T, Nexstar and others have positioned CBS Corp. favorably, enabling it to meet the retransmission targets much ahead of schedule. The company also hinted at the possibility of few media or tech companies coming up with new skinny bundles in 2016, which will help it drive subscription revenues higher. Hence, despite soft revenues, we cannot ignore this Zacks Rank #3 (Hold) diversified media conglomerate’s long-term growth initiatives that are likely to drive revenues higher.
Stocks to Consider
Better-ranked stocks worth considering in this sector include AMC Networks Inc. AMCX, Entravision Communications Corporation EVC and Salem Media Group, Inc. SALM. AMC Networks sports a Zacks Rank #1 (Strong Buy) whereas Entravision Communications and Salem Media Group hold a Zacks Rank #2 (Buy).
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