CBS Corporation (NYSE:CBS)’s business model can be described as advertising-focused, however, it also generates considerable revenue through content licensing and syndication. The network business has grown exponentially over the past few years, primarily due to increase in subscribers, access fee, and licensing.
Valuation summary
CBS generates maximum revenue through CBS and CW networks. At present, they contributes approximately 31% to the overall revenue, followed by CBS TV licensing and owned TV stations & radio, at 21% and 19%, respectively. Furthermore, it generates 15% of its total revenue through outdoor advertising and publishing.
CBS Corporation (NYSE:CBS) has a market cap of almost $29 billion, and the present stock price of around $46 is close to its 52-week high. The stock can have a stronger upside, if CBS can create more revenue streams by expanding in international markets.
Past performance
Since 2007, CBS Corporation (NYSE:CBS) has reported revenue CAGR (compounded annual growth rate) of 9%. It must be noted that CBS has posted 9% growth consistently over the past five years, with the only exception being 2009, where the revenue growth rate fell to 6.5%. On the basis of the growth witnessed, I expect the trend to continue with growing demand for cable networks and increasing subscription fees.
Industry dynamics
Revenue through subscription and licensing are two cornerstones of CBS Corporation (NYSE:CBS). Other key players in the industry, such as Time Warner Inc (NYSE:TWX) and The Walt Disney Company (NYSE:DIS), have consistently reported strong growth in subscription segment, while revenue from the advertising segment remained volatile throughout.
Cable networks targeting a specific demographic are turning heads, and gaining recognition through creation of original programs. Moreover, companies offering pay-tv services usually enter into binding contracts with cable networks, that mark a yearly growth in carriage charge. The contracts are binding for several years, even if there is no growth in subscription, hence guaranteeing revenue growth for cable networks.
Potential to increase the subscriber base
Relative to Time Warner Inc (NYSE:TWX)’s HBO, that sets the benchmark for cable networks, CBS still has a huge room for improvement and growth. HBO possesses a staggering subscriber base of 40 million users. In comparison, CBS’s Flix, The Movie Channel, and Showtime have a combined subscriber base of 76 million. Although, the subscriber base for CBS grew from 55 million during 2007 to 76 million by 2012, the individual subscriber base for each of the three is not even close to HBO yet. This presents a clear opportunity for CBS to expand and record more growth in the coming future.
Competitive landscape
CBS Corporation (NYSE:CBS) competes with Time Warner Inc (NYSE:TWX) and Disney in several categories. Disney generates its maximum revenue through parks and resorts; however ESPN channels play a crucial role for the media company. ESPN contributes roughly 26% to the overall revenue, followed by ABC broadcasting and Disney studios at 13% each. According to Trefis, ESPN constitutes 40% of the $102 billion valuation of Disney, which makes it a decisive revenue stream for the company. During 2012, ESPN enjoyed close to 100 million paid subscribers, that facilitated it in generating $11 billion in revenues.
Similarly, Time Warner Inc (NYSE:TWX) generates its maximum revenue through CNN, TNT, and TBS. The three channels account for approximately 31% of total revenue, followed by Warner Brother Movies at 19%, and TV show production at 18%. HBO contributes 12% to overall revenue. However, according to Trefis stock price valuation, HBO accounts for nearly 22% of Time Warner Inc (NYSE:TWX)’s total stock price. The higher valuation for HBO defines its growth prospects and dominance.
Potential appreciation in stock price
Cable networks contribute 12% to overall revenue for CBS. Nonetheless, according to Trefis, the performance reported by this segment has a much larger impact on the stock price. If CBS Corporation (NYSE:CBS) can create more revenue streams through international expansion and continue the subscriber growth in U.S., then it may be able to sustain a revenue CAGR of 8% to 9% for the next six or seven years.
This implies, that the current revenue of $1.54 billion through cable networks may grow rapidly and touch the $3 billion mark. Such a scenario will give a strong upside to its stock price. This is a realistic opportunity, as HBO has been toppling such growth rates during the past several years. At present, the demand for cable networks is at an all time high, which insinuates a huge international growth opportunity. I expect the growth rate to continue going forward, with robust pay-outs from CBS to its investors.
The article CBS: A Robust Investment? originally appeared on Fool.com and is written by Ashit Gulati.
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