Analysts Aren't Cutting CBS Despite Earnings Miss

CBS Corporation CBS rose Friday despite posting a fourth-quarter earnings miss Thursday.

Content licensing, retransmission and subscription revenue were stunted by sales and renewal timing, and the entertainment and cable network segments recorded underwhelming operating income. Analysts remain positive on the stock nonetheless.

OTT Streaming

By Morgan Stanley’s assessment, CBS benefits from cord-cutting trends, which bolstered distribution and positioned broadcast TV over cable. It also wins in online consumption.

“CBS is unique among Media companies in that the opportunity in streaming clearly outweighs the risks around cord-cutting, as long as retransmission pricing power continues,” Morgan Stanley analyst Benjamin Swinburne wrote in a note.

OTT streaming subscriptions for CBS All Access and Showtime increased faster than analysts expected during the last quarter. The pair struck 8 million combined subscribers a year earlier than planned, inspiring management to raise its 2022 guidance from 16 million to 25 million subscribers.

Original Content Investment

To meet streaming subscription targets, CBS will draw new viewers with fresh original content. It guides for a 30-percent increase in Showtime content hours and expansion of CBS All Access original series from seven to 11.

“As this content comes to market, either on CBS' platforms or through third-party distribution, both revenue and expenses should ramp,” Swinburne wrote. “Evidence this strategy is working can be seen in CBS' $1.6 billion of retransmission revenues in 2018, total distribution revenue growth of 22 percent for the year, and the company already reaching 8 million OTT subscribers between CBS All Access and Showtime OTT.”

UBS Analysts John Hodulik and Batya Levi anticipate accelerated revenue growth as 70 percent of retransmission and reverse subscribers come up for renewal in the next two years.

Fine Financials

CBS will suspend its buyback program for the first half of 2019 to support content development.

“Also helping offset new content investment is an expected $100 million in cost efficiencies, likely helped by the folding of CBS Films,” Salmon wrote.

UBS forecasts a lower tax rate partially offsetting the buyback suspension.

NFL Renewals

Morgan Stanley expects the NFL to renew its broadcast TV contract with CBS after the 2022 season.

“We are skeptical both that (1) the major tech platforms are seriously interested in the multi-year obligations that come with Sunday NFL carriage, and (2) that the league is ready to move that product to streaming on an exclusive basis at this point,” Swinburne wrote. “We continue to expect that a new NFL contract is renewed, and assume a 70 percent increase in average annual value on a new 9-year deal.”

The Ratings

• BMO Capital Markets maintained an Outperform rating and a $63 target;
• Morgan Stanley maintained an Equal-weight rating with a $60 target; and
• UBS maintained a Neutral rating but cut its target from $60 to $54.

CBS shares traded at $50.49 Friday afternoon.

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