CBS Corporation (CBS) Will Continue Its Earnings Growth

CBS Corporation (NYSE:CBS) is a diversified media and entertainment company with operations in TV, radio stations, book publishing, and more.  Despite relatively stagnant revenues since around 2005 (see chart), the company has managed to grow its earnings for the past 4 years.  As a result, the share price has risen from the 2009 low of $3.06 to the current level of around $42.50 for a gain of almost 1300% in just four years.

Now, anytime this kind of a gain happens, I strongly advise that investors take at least some of the profits on the table.  However, in the case of CBS, I believe this company’s best days are still ahead of it, and it has more room to run.

CBS is one of the two publicly traded companies created when Viacom, Inc. (NASDAQ:VIAB) separated in 2006.  One half of the company retained the Viacom name, and included the very well-known cable networks MTV, Nickelodeon, BET and VH1.  Also a part of the current Viacom is the Paramount movie studio and its numerous film franchises, such as Star Trek.  Of the two parts of the former Viacom, I think that CBS is the more attractively valued right now.  Although Viacom trades at a lower valuation than CBS, the projected forward growth rate of 12% is good but it pales in comparison to that of CBS.  More on that later…

The remaining parts of the company became CBS, which currently operates in five segments: Entertainment (52% of revenues), which includes the CBS networks and related businesses, Cable Networks (11%) including Showtime, Publishing (5%) which includes the Simon and Schuster book publishers, Local and Broadcasting (19%) which owns and operates 30 local TV stations, and Outdoor (13%) which operates billboards and other displays.

CBS’s general strategy is to grow its revenues and simultaneously become less dependent on advertising-based revenue streams.  Advertising currently makes up 63% of the company’s revenue stream, with the rest coming from licensing and distribution (23%) fees (12%) and other revenues (2%).  One of the ways CBS is trying to grow its distribution stream is through its deal with Netflix, Inc. (NASDAQ:NFLX).

Netflix and CBS first announced a two-year deal in early 2011 whereby Netflix would have the rights to stream such shows as Star Trek, The Twilight Zone, Cheers, and many others.  Recently the company announced the extension of this deal, as both parties have found it a beneficial arrangement.  The new agreement includes more shows to offer Netflix’s members (and provide CBS more licensing fees).

CBS pays a modest dividend yield of around 1.1%, however the company has an excellent buyback program, with $2.8 billion remaining in authorized share repurchases, which the company anticipates completing by 2014.  Since 2010 the number of outstanding shares has dropped from 694.5 million to 635.4 million, a reduction of 8.5% of the total in just two years.

Analysts tend to agree, and forward growth projections are very optimistic.  When CBS reports earnings later this month, they are expected to report $2.55 per share for 2012, which would be a nice increase from the $1.94 in 2011.  These earnings are further expected to increase to $2.92 and $3.31 in 2013 and 2014, respectively, for a 3-year annual average growth rate of 18.6%, one of the best forward growth rates in the market.

Considering this growth CBS is very attractively valued right now, trading at just 16.5 times 2012’s earnings.  It is almost unheard of for a company to be trading at a lower P/E ratio than its growth rate (normally the P/E is about twice the growth rate).  While this certainly implies that the market is uncertain of the company’s ability to deliver on these projections, however I believe that the company is heading in the right direction to do just that.

The article This Broadcaster Will Continue Its Earnings Growth originally appeared on and is written by Matthew Frankel.

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