CBS Is 'Extraordinarily Well Positioned' Ahead Of A Consolidation Wave That Could Boost Multiples

Brean Capital believes CBS Corporation CBS is “extraordinarily well positioned” to benefit from potential wave of consolidation in the media industry despite its merger talks with Viacom, Inc. VIAB not having materialized.

Positives

The factors favoring CBS include:

• Two core networks.
• Predictable retrans/reverse comp driving growth.
• Modest programming cost increases as its key sports contracts are locked in.

For any potential buyer, scale is key given the cost of future programming rights. In the current situation, CBS is the most attractive asset owns the most watched broadcast or cable network and owns most of the prime-time shows, thanks to its coverage of NFL and NCAA basketball games.

“We recognize that the company is 78 percent controlled by the Redstone family, but believe the Redstone's passion lies more with Viacom, which it grew from infancy, rather than CBS,” analyst Alan Gould wrote in a note.

Competition In The Space

Among rivals, AT&T Inc. T already bid for Time Warner Inc TWX, Walt Disney Co DIS is too large to buy and Twenty-First Century Fox Inc FOXA is effectively not for sale with the Murdoch family's 39 percent control.

Gould also noted that he would not be not be surprised if CBS has to spend $15 billion for its next seven- or eight-year NFL contract, which could include streaming rights apart from broadcasting rights.

Meanwhile, Gould believes retrans/reverse comp should be CBS’ largest growth driver for the next few years and should single handedly drive 11 percent EPS growth even assuming EBITDA from advertising and licensing is flat to down.

“Management has projected $2.5 billion of retrans/reverse comp by 2020 and we believe CBS will be able to push its retrans (affiliate) fee to over $3.00 monthly after 2020,” Gould continued.

In addition, the analyst still expects a mid-high-teens EPS five-year CAGR for CBS despite challenging comparisons in 2017 versus the Super Bowl and elections.

Shares of CBS closed Thursday’s trading at $64.50. Gould, who has a Buy rating on the stock, raised his price target by $10 to $75.