The media industry gets a bad rap these days. The Internet is changing the way people consume content and the traditional media giants are headed for disaster, say the detractors. While this is true for many operations, not all media conglomerates are in trouble.
One company that’s been getting a lot of positive attention is CBS Corp. (NYSE: CBS). On March 17, Laura Martin, an analyst at Needham & Co, raised her 12-month target on the stock from $70 to $83. (It’s currently trading at $66 a share.)
There were several reasons for the upgrade, but the two big ones were aggressive share repurchases and a continued diversification of revenues sources, meaning less focus on traditional advertising.
The company has announced that it will buy 5% of its outstanding shares for $2 billion in the first quarter of this year. It will likely buy even more shares after it finishing spinning off its outdoor advertising business into a REIT—a move that was announced in January 2013—in the first half of this year.
The share buy backs alone makes it a good buy, says Martin.
“Share repurchases suggest an effective floor under CBS’s share price and lowers investment risk, thereby rebalancing the risk/reward ratio to the upside for public investors,” she writes.
CBS also announced that a number of different fees, such as retransmission and reverse compensation, would double to $2 billion by 2020. The revenue on these fees has an 80% to 90% profit margin, she says.
Non-advertising revenues—“recurring and visible revenue streams,” she writes—will also reach 50% of total revenue over the next three years. “These metrics suggest income statement momentum and valuation multiple expansion,” she says.
Other positives include a new deal with the NFL, which will add 32 more hours of programming and incoming political ad revenue of about $220 million in the upcoming 2014 election year.
It’s also making a good chunk of change on its “subscription video-on-demand” services. It made $500 million on deals with Netflix, Hulu and Amazon and that should only grow in 2014.
According to Martin, all of these things, plus an attractive price-to-earnings ratio of 16.7 times — the industry average is 20.6 times, she writes — make CBS a buy. She’s not the only who thinks this either. The median target price on the company is $77, with the top price at $90.