CBS’s Growth Outlook Gains

Apr 24, 2006  •  Post A Comment

Has Wall Street underestimated the momentum behind CBS Corp.?

When it emerged from the breakup of Sumner Redstone’s Viacom last year, CBS was cast as the new Viacom’s slow-growth counterpart whose radio and television assets, combined with publishing and outdoor advertising, generated a lot of cash but didn’t make for a particularly exciting company. That was especially the case when compared with Viacom, whose properties include the fast-growing MTV Networks as well as Paramount Pictures, the troubled studio that is trying to stage a comeback.

Mr. Redstone broke up the former Viacom in order to assuage investors confused about what sort of company he controlled. Investors interested in buying into a growth stock were to be directed to Viacom, while those more keen on being paid dividends than on growth could buy into CBS.

The thing is, if CBS was supposed to be the quiet, unassuming child, someone forgot to tell CEO Leslie Moonves. Ever since the breakup was announced, and certainly since the split has become official, CBS and Mr. Moonves have been making waves-and headlines. The company has struck VOD deals with cable operator Comcast, has made downloads of popular series available on iTunes and Google and has announced plans to shut down one broadcast network in order to make way for another.

That heat has yet to translate into a stock-price bounce, however. Since the start of the year, CBS shares are down more than 5 percent, while the S&P 500 Index has advanced 3 percent. Viacom’s widely traded Class B shares are off more than 7.5 percent.

For his part, Mr. Moonves appears to be taking the lack of investor enthusiasm in stride. At a recent investor conference, when asked about the company’s stock price, Mr. Moonves said, “We like the attitude that people look to us like the underdog. I think people are underestimating us a little bit.” He then advised the investor audience to “get on the train [because] it’s going to be a great ride.”

Indeed, one of Mr. Moonves’ mantras has been the ability of CBS to open up a slew of new revenue streams thanks to the company owning much of its content. What’s more, when it makes sense, CBS is making acquisitions, such as the Web play it made earlier this year when it bought College Sports Television with the idea of leveraging CSTV’s college sports team Web business with CBS’s broadcast of college sporting events, such as the NCAA basketball championship games.

Some analysts are starting to see Mr. Moonves’ logic.

“We believe CBS remains one of the best value stocks in all of media,” wrote Credit Suisse analysts William Drewry and John Klim in a research note, adding that Wall Street is underestimating CBS’s free cash flow generation and at the same time writing off CBS’s growth potential.

“We contend that there is nothing wrong with ‘slower growth’ businesses as long as valuation and management’s use of free cash flow reflect said slower growth,” they wrote.

The new Viacom is no slouch, either. Though uneven ratings at the various cable channels and the lack of a potential blockbuster film until next month’s release of the second sequel to “Mission: Impossible” mean the company’s first-quarter results might not dazzle shareholders, many analysts expect 2006 to be a year in which Viacom lives up to its billing as the growth company.

But what is becoming clear is that CBS is poised to do some dazzling of its own. In the short term, strength at the television and outdoor advertising operations in the first quarter are seen as offsetting at least some of the weakness at CBS Radio, which has been rocked by the departure of radio personality Howard Stern. For the rest of the year, strong ratings at the CBS broadcast network, an expected increase in ratings and advertising revenue at the new CW Television Network, the added benefit of political advertising revenue at the local television stations and continued strength at the outdoor business mean the company could surprise many investors.