CBS Has Strong Quarter, But Viacom Merger Uncertainty Keeps Analysts On Sidelines

CBS Corporation CBS reported strong second-quarter earnings on continued subscriber gains for its streaming platforms and good ad sales, but the growth remains overshadowed by the unsettled picture around the company’s possible merger with Viacom Inc. VIAB.

“Cloudy with a chance of M&A,” was how one analyst put it, citing the overhang of the Viacom talks, but CBS had little but good news to report in its second quarter print, with revenue of $3.81 billion and EPS of $1.16, both beating the Street.

The Analysts

Credit Suisse analyst Douglas Mitchelson continued to rate CBS Outperform and kept a $66 price target.

UBS analyst John Hodulik remains Neutral on the stock with a $54 price target.

Bank of America's Jessica Reif Ehrlich reiterated a Neutral rating with a $58 price target.

OTT

If everyone’s leaving TV for over-the-top streaming services, it should be bad news for TV companies. Unless the TV companies are getting those viewers to go to their own OTT services. And that’s what’s going on at CBS, which reported better-than-expected revenue led by robust OTT subscription growth for both the CBS All Access and Showtime subscription services.

OTT subscriptions grew 75% year over year, better than in the first quarter when they were 71% higher than the previous year, and CBS management said watch times are up 60% for CBS All Access, and up 30% for the Showtime OTT service.

Advertising Strength

Hodulik also acknowledged CBS management’s optimism “that advertising strength will continue, noting ‘substantial’ CPM increases in the Upfront with Primetime and Late Night the top performing dayparts while Sports, News, and Daytime were also strong.”

Mitchelson, however, needs to see the OTT increases pay off in light of the company’s reported efforts to boost viewership by investing more in content.

“Key will be whether OTT subs continue to scale against the investments being made in content, translating the strong upfront to ad growth, NFL ratings, and content sales the remainder of the year given CBS’ ramp in production,” Mitchelson wrote in a note.

M&A Cloudiness

While Mitchelson continued to see CBS as an outperformer, the good news on the OTT and ad fronts wasn’t enough to get others off the sidelines, given merger uncertainty.

“Although shares are trading at a cheap 9x 2019E P/E with value creation possible via continued retransmission gains, OTT traction and content licensing, we believe increased upfront investment in OTT products and a moderated capital returns could leave shares range-bound, particularly given leadership uncertainty and a lack of visibility on the M&A front,” Reif Ehrlich wrote in a note.

Price Action

CBS shares were down 3.3% at $49.19, while Viacom shares were down 1.9% at $30.18.

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