Time To Look At CBS Again?

With the recent equity market volatility, shares across every sector have fallen sharply. That does not mean that fundamentals have changed that much, especially for the media companies. In fact, CBS CBS appears to be getting stronger, not weaker, and the recent pullback in shares could prove to be a good buying opportunity. Michelle Steele, Bloomberg's sports business report tweeted that Andy Donchin, who is a media buyer at Carat, said that CBS is getting more than it got last year for a 30 second ad during a national NFL game this year. It received $435,000 last year, and this year is getting more thanks to more eyeballs. Last last month, CBS announced it would be doing a licensing deal with Netflix NFLX to bring CBS' content to Canada and Latin America. This is not the first deal that CBS has signed with Netflix, and Les Moonves and the rest of his team continue to find ways to monetize old content that is just sitting on the shelf doing nothing. CBS has also done deals with Amazon AMZN in the past, so it is not just a one trick pony depending on the growth of Netflix. Shows like 90210, Twin Peaks, Numb3rs as well as Dexter, and Californication all offer higher margins when licensed to Netflix and Amazon, as the costs are much lower than they are for first run shows. The original "Star Trek," "Star Trek: The Next Generation," "Charmed," and "Twin Peaks" are bringing big bucks back to CBS. Shares trade at almost 13 times 2011 earnings, but looking forward to 2012, there is a sharp discount, trading at less than 11 times earnings. That is downright cheap for a media company, especially one like CBS. Throw in a 1.8% dividend yield, and one could make the case CBS is extremely undervalued here. There are price targets on Wall Street that are as high as $37, a full 60% away from current levels. With the NFL back, advertising rates continuing to climb, and the ability to generate tremendous amounts of free cash flow from existing properties, CBS appears to offer great value here. Not bad for the "old folks" network. ACTION ITEMS:

Bullish:
Traders who believe that CBS will continue to find ways to monetize its assets and generate higher ad buy rates might want to consider the following trades:

• Go long CBS on dips and pullbacks. Moonves and his team have done a wonderful job of selling old content to distributors. There is no reason to think that the company will stop now. If the economy stays where it is, ad rates should stay stable, and CBS will benefit.

Bearish:
Traders who believe that the economy will get worse may consider alternate positions:

• If ad rates start to slip, this could be a huge deflationary spiral. CBS will not be able to generate as much for its spots, and the earnings multiple could be overvalued where it currently is.
  
  

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