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Why Is CBS (CBS) Down 14.2% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for CBS (CBS). Shares have lost about 14.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is CBS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

CBS Q2 Earnings & Revenues Increase Y/Y, Beat Estimates

CBS reported second-quarter 2019 adjusted earnings of $1.16 per share that increased 3.6% from the year-ago quarter. The reported figure also beat the Zacks Consensus Estimate by 3 cents.

Revenues increased 12.9% from the year-ago quarter to $3.81 billion, surpassing the consensus mark of $3.71 billion.

Advertising revenues (37.4% of total revenues) climbed 7.3% year over year to $1.42 billion. CBS’ broadcast of the national semifinals and championship game of the NCAA Division I Men’s Basketball Tournament positively impacted advertising revenues.

Content licensing & distribution revenues (11.7% of total revenues) were up 11.7% to $1.22 billion, backed by higher domestic licensing sales.

Affiliate and subscription fees (29.2% of total revenues) jumped 23.9% year over year to $1.11 billion. Robust performance from direct-to-consumer services, CBS All Access and Showtime, were major revenue growth drivers.

CBS remains on track to reach its goal of 25 million subscribers in direct-to-consumer services (on a combined basis) by 2022.

Moreover, increases in fees from CBS Television Network affiliated stations and retransmission revenues, driven by virtual MVPDs, stoked top-line growth.

However, other revenues declined 11.1% year over year to $48 million.

Furthermore, adjusted operating income inched up 1.2% year over year to $702 million, driven by higher revenues. However, operating margin contracted 160 basis points (bps) to 18.4%.

Segment Details

Entertainment revenues (72% of total revenues) increased 14.1% year over year to $2.74 billion.

This solid year-over-year upside was backed by 9% increase in advertising revenues, 18% growth in content licensing and distribution revenues, and 22% improvement in affiliate and subscription fee revenues.

Entertainment operating income increased 16.1% year over year to $426 million owing to higher revenues.

Cable Networks’ revenues (14.8% of total revenues) went up 1.6% to $562 million. Increased revenues from Showtime digital streaming subscription offerings as well as contribution from Pop fueled top-line growth.

Notably, CBS acquired a 100% stake at Pop in March 2019.

However, Cable Networks operating income decreased 24% year over year to $185 million due to lower licensing revenues. In addition, increased investments in programming, including costs associated with the premieres of the new series City On A Hill and the limited series The Loudest Voice, negatively impacted profitability.

Publishing revenues (5.7% of total revenues) of $218 million increased 5.3%, aided by print book and digital audio sales. The bestselling titles in second-quarter 2019 were Howard Stern Comes Again by Howard Stern and The Pioneers by David McCullough.

Publishing operating income advanced 6.5% to $33 million on the back of stellar top-line growth.

Local Media revenues (11.1% of total revenues) climbed 0.7% to $423 million, primarily supported by higher retransmission fees and increased advertising revenues owing to the NCAA Tournament broadcast.

Local Media operating income increased 1.6%, year over year, to $130 million, driven by solid revenue growth.

Balance Sheet & Cash Flow Details

As of Jun 30, 2019, cash and cash equivalents were $216 million compared with $500 million as of Mar 31, 2019.

Additionally, as of Jun 30, 2019, long-term debt was $9.36 billion, unchanged from Mar 31, 2019.

Operating cash outflow in the June-end quarter was $124 million compared with $438 million reported in the previous quarter. Free cash outflow was $157 million compared with $411 million reported in the prior quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, CBS has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, CBS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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