Description

Investment Thesis:

CBS Corporation is a consolidated media company with four segments: (1) Television (approximately 66% of revenues); (2) Radio (approximately 14% of revenues; (3) Outdoor (approximately 15% of revenues); and (4) Publishing (approximately 6% of revenues).   At $26.50 per share, the company trades at less than 7.5x 2008e EBITDA and an approximately 8% free cash flow yield, a significant discount to its comps and private market valuations of between 11-13x EBITDA.  While recognizing that the company was written up almost two years ago (February 2006), we now believe that CBS is an even more compelling value, as the stock has essentially roundtripped back to its original spin-off price from Viacom.  A sum of the parts valuation of CBS would yield an equity value in excess of $40 per share, which suggests an attractive return at these levels.  Moreover, at its current valuation, the downside should be limited, especially in light of its capital allocation decisions to date, near-term catalysts including retransmission fees, and the 2008 election year.  CBS currently has a dividend yield of approximately 3.6%

Company Description

Though commonly associated with the CBS network, the Company maintains a diversified earnings stream (though dependent on advertising), with the network responsible for approximately 15%-20% of total EBITDA.  The entire division does approximately $2bn of EBITDA (on $3.2bn 2008e)  In its television segment, the company also maintains approximately 40 television stations, cable networks (including Showtime), and a production and syndication operation.  Margins in this business are approximately  20-21%, and revenues have been relatively steady the last several years.  While we recognize that the writer’s strike will impact the profitability of this division in the near term, ultimately the Company should revert to its historical margins.   Television stations trade at around 12-13x EBITDA, and while CBS’ division includes the admittedly lumpy network, we believe this division should be worth only slightly less.

The radio division which is comprised of over 100 stations throughout the United States, has as expected, struggled the last couple years (as has the entire industry).  Nonetheless, with an approximate 40% EBITDA margin, the core business is still a solid profit generator, and is showing signs of a bounceback under the leadership of Dan Mason.  In total, Radio comprises approximately 22-24% of the Company’s EBITDA.  From a public comps perspective, this division should be worth approximately 11-12x EBITDA, possibly higher given CBS’ concentration in top-20 markets.  Private market valuations have been 2-3 points higher – and CBS has realized these valuations in sales of their lower-performing stations.

The outdoor division is the “growth” part of the Company’s business.  With margins approaching 30% and long-term growth prospects in the high single/low double digits, the outdoor division is worth a significant premium relative to the rest of the Company’s businesses.  Moreover, as the Company converts more of its billboards to digital, the new pricing structure should enable the division to post even higher margins and revenues.  In total, the outdoor division should generate approximately $700mm of EBITDA next year.    Not surprisingly, the main public comp – Lamar – trades at approximately 14x EBITDA.

Finally, the publishing segment, which consists of Simon & Schuster, generates approximately $90mm of EBITDA per year. 

Management

For an “old media”, “low growth” business, CBS’ management, led by Les Moonves and Fred Reynolds, has done an admirable job since the spinoff early last year.  In particular, they’ve instituted buybacks totaling $3bn, they’ve divested their non-core, weaker performing radio stations at valuations of approximately 12-14x EBITDA, and they've sold their parks business.  While they've started entering some "new media" businesses, they've done so in a conservative fashion, constructing a portfolio of businesses while not spending a large amount of their fress cash flow.  Mr. Moonves recently signed a new contract, which includes provisions that give him ample motivation to drive the stock price going forward.

Valuation

If we apply private market multiples, CBS should be worth well in excess of $45 per share.  We believe that the CBS is worth approximately $45 as follows:

Radio: 12.2x (a blend of large market v. small market) = $9.4bn

TV: 11.1x (using a higher multiple for stations, lower for network, etc) = $21.5bn

Outdoor: 14x = $9bn

Publishing: 9.5x = 800mm

Total before corporate and residual costs = $40.7bn

Less corporate/residual at blended of 11.8x = $37bn

Less net debt/other (e.g., pension)/plus assets, etc = $30bn equity value

Using the 670mm shares that they’ll have after they’re through with their second buyback should yield an equity value of approximately $44.00

Bear case

The chief bear case is the control discount due to Sumner Redstone’s holdings.  That being said, given Sumners age (84 years old) and given that CBS is his “stepchild” (relative to his interest in Viacom), it is not inconceivable that there could be a change in control in the near future.

Other bear cases include the growing use of DVRs (from 21% penetration last year to an estimated 30% this year), which CBS is addressing through incremental changes to its strategy and business model (e.g., getting measured by advertisers on C+3 viewings), the decline in radio (though we believe that CBS could exhibit growth next year given its positive indications in the New York market, the political year, etc), and lack of a near-term catalyst.  Nonetheless, we believe at its current price, these concerns are more than factored in already.

Catalyst