CBS Corporation (CBS), Gannett Co., Inc. (GCI): This Content War Is About Costs

CBS Corporation (NYSE:CBS)

CBS Corporation (NYSE:CBS) and Time Warner Cable are fighting over carriage costs. Such fights are likely to get more common, showing just how valuable video content is becoming. Two other station owners are bulking up for a fight, too.

Carriage costs

CBS Corporation (NYSE:CBS) is asking Time Warner Cable to pay higher fees for the right to rebroadcast CBS Corporation (NYSE:CBS)-owned stations in key markets like New York City, Dallas, and Los Angeles. Although television stations have been losing viewers to cable for years, they still attract a lot of eyeballs. And having the local television stations on cable is an important selling point for the cable companies.

That both companies are willing to take this fight down to the wire, and then some, is a statement about the battles that are yet to come over the value of content. For example, CBS Corporation (NYSE:CBS) is the highest rated broadcaster, beating NBC and ABC. According to Bloomberg, the company’s retransmission fees jumped over 60% in the first quarter. The company is clearly using its clout to extract more money for its content.

CBS Corporation (NYSE:CBS)’ revenue has been stuck at around $14 billion for about eight years. Over the last three years, however, the company’s profit margin has improved from around 8% to over 20%, leading to an earnings advance from just over $0.30 a share to nearly $2.40. After hitting a low during the 2007 to 2009 recession of less than $5 a share, the stock recently traded hands at over $50.

With a price to earnings ratio of around 20, the company’s solid performance is reflected in its price. Although it may not get everything it wants from Time Warner Cable, it looks like CBS Corporation (NYSE:CBS) is well positioned. For example, Time Warner Cable would be loath to lose CBS’ football broadcasts, let alone the other content it shows. Sports remains a key differentiation between cable and Netflix.

The two sides will eventually come to terms. Look for the outcome to help boost CBS’ results over the next few years. The stock isn’t cheap, but growth investors should still consider taking a look at the key content owner and distributor. That said, a return to top-line growth should be a major concern.

Bulking up for battle

Gannett Co., Inc. (NYSE:GCI) recently inked a $1.5 billion deal to buy Belo, nearly doubling its station count. Although part of the benefit was to reduce the company’s exposure to its newspaper business, the more important aspect was to gain more clout in its video business.

This gives Gannett Co., Inc. (NYSE:GCI) more bargaining power when purchasing content and it will allow the company to demand more money from cable companies that rebroadcast its stations. A double benefit. Tribune Company, only recently out of bankruptcy court, announced a similar deal, spending $2.7 billion to buy 19 television stations from a private equity firm. Also a near doubling in size.

Of the pair, Gannett Co., Inc. (NYSE:GCI) is more appropriate for income investors looking for a solid turnaround play. The company is retrenching as the newspaper industry declines. While other newspaper companies have been mired in red ink, or gone through bankruptcy court like Tribune, Gannett Co., Inc. (NYSE:GCI) has only lost money once in the last decade. It earned $1.80 or so a share in 2012 and has been increasing its dividend again.

The newspaper business is facing material headwinds, but Gannett Co., Inc. (NYSE:GCI) is positioning itself well for a video world. Its P/E is about 13, above its historical average but low relative to CBS. Although Gannett Co., Inc. (NYSE:GCI) doesn’t have the production assets of the media giant, its changing business suggests that a higher multiple is probably reasonable over the long term.

Euphoria about the station purchase pushed the shares quickly higher. They have cooled off some since then. Patient investors should take a look.

Tribune is a higher risk situation. Although bankruptcy helped get the company back on its feet, it had $10 billion in debt and negative shareholder equity at the end of the first quarter. The TV deal is a good move, but the company has a lot to prove and very little historical data go on right now. Only the most aggressive investors should jump aboard Tribune as it tries to reshape itself outside of bankruptcy court.

More fights to come

There’s going to be plenty more battles over content in the years ahead. The industry’s players are clearly getting ready for the fight. Look for CBS to win more than a few rounds. Gannett and Tribune are stuck in the middle, to some degree, lacking content creation businesses. Increasing scale, however, should allow them to fight to control content costs and ask for more money from cable companies, aiding their turnaround efforts. Gannett is better of the two options.

The article This Content War Is About Costs originally appeared on and is written by Reuben Brewer.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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