How CBS Might Be Different Than Every Other Cable Play

• In a report issued Friday, Macquarie analysts Tim Nollen and Ankesh Agarwala reiterate an Outperform rating and $55.00 price target on shares of CBS Corporation CBS
• In a context where investors do not feel especially confident on the future of cable networks, the analysts believe “CBS is different from its peer group.”
• Shares of CBS are very slightly down on Friday trading.

According to the research note, what differentiates CBS is its nature as a “predominantly broadcast network business not historically reliant on affiliate fees, and with a direct-to-consumer OTT offering in Showtime,” which the firm believes can offset traditional bundle weakness.

The analysts also note that, since advertising is more important to CBS than to most other networks, the new broadcast season, which started this week, “could be an important indicator of consumer viewing trends.” After last year’s marked declines in ratings, the experts hope for better ones this year, and initial data from a few shows seems quite positive. In fact, they add, if industry ratings show an improvement from last year and the TV ad market remains robust, investors might regain some confidence in the business, which many see as “falling apart.”

On top of a stronger lineup for its network, CBS is betting on its streaming sites. The company is “stepping up ad sales (…) using Nielsen digital ratings,” the experts expound.

OTT Opportunities

The report assures CBS is less exposed to cord cutting than its cable peers, since:

1) Retrans/reverse comp revenue accounts for a smaller part of its overall business -- only ~6 percent of total revenue.

2) “Reverse comp is not at risk”

3) The company is “well represented on virtually all skinny bundles. Also, and perhaps more importantly, its unique ability to provide direct-to-consumer offerings through its CBS All Access and particularly its Showtime OTT services helps hedge against bundle sub declines” -- the firm estimates that, taken in isolation, the OTT revenue could offset an overall loss of 10 percent of traditional pay TV subscribers in 2018.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.