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After the media sector's 'big bang,' a bargain stock emerges

Michael Santoli
Michael Santoli
After the media sector's 'big bang,' a bargain stock emerges

Every investor has a plan to shop for bargains -- until the market gets hit, when fear pushes aside greed and beaten-up stocks start to appear “cheap for a reason.” 

In today’s unstable market, the ideal stock would be cheap for no good reason, with a sturdy brand, domestic-focused business, a plan to exploit new technology and clear catalysts to liberate value. 

CBS (CBS) meets these criteria pretty nicely, while also serving as a play on the indomitable American couch potato. 

Shares of the television-network operator have lost about a third of their value since early June, as a profit slowdown and concerns about risks to the broad pay TV business model flared. Walt Disney (DIS) CEO Robert Iger’s cautious words about cable network economics, as cord cutting grows as a threat, have punished all Old Media stocks. 

As a result, CBS looks cheap, despite being more insulated from the “over-the-top” content consumption than its peers. The stock trades at just over 12-times expected earnings for this year and slightly more than 10-times the 2016 consensus forecast. 

The company had to absorb hefty added costs in the past several months for parts of its pro-football rights package and some expensive primetime series that are not returning this season. These are receding, and CBS is still delivering the highest average primetime viewership in the country. 

In recent years, CBS’ forceful CEO Leslie Moonves has been charging cable systems and other distributors for “retransmitting” its programming, grabbing a piece of the pay TV revenue pie that its flagship broadcast network had previously not enjoyed. 

Yet this process might have plenty more room to run. Deutsche Bank analyst Bryan Kraft points out that while CBS commanded about 8% of all viewing minutes last year, it pulled in only about 1% of all pay TV affiliate fees. 

Because CBS is so widely watched and relatively inexpensive, it will almost surely be included in any of the “skinny bundles” of channels being marketed for consumers who don’t want a standard, comprehensive cable or satellite package. 

CBS’ Showtime premium entertainment network is now offering its own “over-the-top” subscription offering, which should become a significant contributor to the bottom line in 2016. Because four-times as many U.S. households don’t have Showtime as do subscribe, the network can more easily grow outside the bundle, without much risk of cannibalization. 

The CBS network has locked up multi-year rights to valuable pro sports, still the most valuable programming at a time when much entertainment is viewed in recorded or on-demand form. 

It has the National Football League’s AFC games through 2022, Thursday night NFL games this season, the Super Bowl this coming winter as well as in 2019 and 2022, and the college basketball tournament through 2024. 

Even the older median age of CBS’s primetime lineup – with scripted series such as “NCIS” and “The Good Wife” – can be viewed as an asset in the changing TV landscape. 

Kraft figures this means the audience will be more stable, as those over age 50 are not fleeing linear TV for streaming video or YouTube. This means the ad dollars in categories such as pharmaceuticals should be stickier. 

CBS’ network of local TV stations is poised to reap a bonanza of political ads as the presidential campaign gathers steam, as well. 

The Deutsche Bank analyst had been neutral on CBS shares until early September, when he upgraded them to a Buy at a price of $43.51, about a dollar above the current quote. He has a price target of $60, more than 40% up from here, representing an undemanding 15-times his 2016 profit forecast. 

One perceived overhang on CBS shares is its somewhat complex corporate structure. Nearly a decade ago, CBS split from Viacom (VIA, VIAB), the media conglomerate created by Sumner Redstone. The 92-year-old mogul continues to hold voting control over both companies through his family trusts.  

Some investors fear that he or his heirs might want to recombine the companies, and due to the family’s control of both could try to do so on terms unattractive to public shareholders. 

Yet one portfolio manager who owns CBS says he doubts things will develop that way. If, say, CBS received a low-ball bid from Viacom, the company would immediately be “in play,” and suitors would emerge to pay a higher and fairer price. 

Plenty of investors have pointed out that CBS seems a good fit for Time Warner (TWX). The companies jointly own the CW Network, share NCAA basketball tournament rights, could merge their big news divisions and would boast both HBO and Showtime. 

There is nothing to suggest any such union is probable or imminent. But the logic is sound. And the fact that CBS would have such value to a big, strategic player should stiffen the backbone of investors looking to step into a banged-up market to buy a bargain-priced CBS.