Digital offerings to beat our expectations, but the stock is trading in 3-star territory, and we would wait for a larger margin of safety.
By Neil Macker, CFA | 05-04-17 | 10:50 PM | Email Article

 CBS  posted a slightly better-than-expected quarter to start 2017. While overall revenue was down 7% year over year due largely to the Super Bowl in first quarter last year, the firm continues to benefit from persistent retrans and reverse comp revenue growth. We reiterate our narrow moat rating and our fair value estimate of $65. With the stock trading in 3-star territory, we would wait for a larger margin of safety before investing.

Neil Macker, CFA, is an equity analyst for Morningstar.

Affiliate and subscription fees grew 17% year over year as retrans and reverse comp were up 28% and the SVOD services continue to expand. CBS has 14% of its reverse comp and 21% of its retrans footprint coming up for renewal in 2017 and has already signed deals with Verizon and Meredith Broadcasting. Our skepticism that the firm will meet its 2020 goal of $2.5 billion from these sources is decreasing as the management now expects to reach $1.25 billion in 2017. Overall ad revenue was down 24% year over year as the firm had one fewer NFL playoff game and no Super Bowl but adjusting for these games, ad revenue was only down 1%. Adjusted operating margin fell by 20 basis points versus a year ago to 21.1% as revenue growth in high-margin areas such as retrans and reverse comp were more than offset by increased content costs and lower ad revenue.

The CBS digital offerings continue to beat our expectations as management implied that CBS All Access now has about 1.5 million subscribers with only one exclusive show and no NFL streaming. The service will soon debut a new exclusive Star Trek show and feature streaming of NFL games this fall, both of which should accelerate subscriber growth even faster. The firm will also bundle CBS All Access with Showtime Now for a slightly discounted rate. While we were skeptical about the demand for a standalone OTT service, CBS has demonstrated that its brand and content can command $5.99 per month for a free to air broadcast network.

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Neil Macker, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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