CBS Earnings Preview: What to Expect

Leslie Moonves - Getty - 2016
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Super Bowl 50 boosted results, and ahead of the upfront, CEO Leslie Moonves is expected to discuss ad trends, with Wall Street also looking for possible commentary on a potential change to the company's dual-class stock structure.

Strong advertising results, helped by Super Bowl 50, and bullish upfront advertising market commentary will be key parts of CBS Corp.’s first-quarter earnings report and conference call after the market close Tuesday, according to Wall Street analysts.

Beyond upfront color, investors also will listen for comments from chairman and CEO Leslie Moonves on the planned sale or spinoff of the company’s radio station business, which CBS first announced in March, and a possible change to its stock structure.

CBS has been talking to investment bankers about how Moonves could gain more control over the company once chairman emeritus Sumner Redstone doesn’t control his 80 percent voting stake anymore, according to a recent Reuters report. It said that the company was looking at buying voting shares from Redstone’s National Amusements and ending its dual-class share structure to give every share one vote. A seven-person trust, which includes Redstone daughter Shari and Viacom CEO Philippe Dauman, will eventually take over Redstone’s voting shares.

Wall Street expects CBS to grow its first-quarter earnings per share, with the average forecast for the Tuesday afternoon report standing at 94 cents, or 93 cents on a fully reported basis, compared with 78 cents in the year-ago period, according to First Call. Revenue is expected to grow to more than $3.8 billion, compared with $3.5 billion in the year-ago period.

FBR analyst Barton Crockett recently raised his quarterly adjusted earnings forecast slightly to 95 cents per share “on a stronger view of ad revenue from the Super Bowl.”

“CBS should continue to benefit from a strong ad market and its hosting of the Super Bowl (with $5 million per-spot ads) should produce a pop in revenue and earnings in the first quarter,” wrote Macquarie Securities analyst Tim Nollen in raising his earnings estimate by 4 cents to 94 cents per share. “There could be even more upside on Super Bowl ad sales and general ad market strength, bolstered as well by early political season spending at local broadcast.”

CBS remains his 2016 top stock pick among media and entertainment conglomerates.

CBS’ ad commentary is expected to underline strong TV trends across much of the industry after NBCUniversal CEO Steve Burke last week highlighted "one of the strongest scatter markets I have ever seen" and predicted “a strong upfront.”

Nollen said that “TV advertising is robust due to factors including the weak upfront market last year, fewer bad ratings this year and a generally good U.S. ad market.” Echoed Wells Fargo’s Marci Ryvicker: “The commentary has been across management teams that network ad spend remains pretty healthy.”

Sanford C. Bernstein analyst Todd Juenger also said that "throughout the quarter, we've grown more constructive on CBS, relative to other media companies." He explained: "Everybody has too many networks. CBS (and Scripps Networks) do not. Everybody gets paid way too much for their too many networks. CBS (and Scripps) do not."

But he warned that investor sentiment could weaken in the second half of 2016. "CBS is prone to the most violent swings in sentiment (and stock price) among large cap media names, and we fear that will work against them," explained Juenger. "If we are correct that advertising will slow, that will hurt CBS more than most. The Olympics will hurt CBS more than most."

Industry watchers also expect CBS on its earnings call to once again highlight such growing revenue streams as retransmission fees and others detailed at its recent investor day. “CBS recently outlined drivers it expected would sustain its operational progress and support its stock, with high-value revenues like retrans and reverse comp joined by international, OTT and skinny bundles plus improved audience monetization,” said Barrington Research analyst James Goss.

And Nollen said he was looking for updates on the planned sale or spin-off of CBS Radio, saying that “helps de-risk the business model further, removing this low-growth ad-supported business.” Said the analyst: “We await comments on divestitures methods and sales proceeds — we believe the proceeds from a sale could be used to fund further content production, which could further strengthen the value of CBS on the traditional pay TV bundle and on OTT/skinny bundle products.”

Stifel Nicolaus analyst Benjamin Mogil also expressed interest in CBS’ latest general thoughts on how to leverage content in the digital age and on “the trade-off between near-term domestic syndication revenue and [streaming service] CBS All Access affiliate and advertising fees.”

He explained: “Given that CBS is a fully distributed channel, in order for CBS All Access to be successful, the addressable market must be larger than just the cord cutting/cord never market. As a result, we believe that for CBS All Access to be successful some of the upcoming CBS aired (and owned) product needs to be licensed to its service and in this lies a likely challenging proposition for CBS, as the company will likely have to endure margin compression as the increase in affiliate fees/advertising from CBS All Access in the near term will not offset the syndication revenue that it will forgo from third parties, but longer term continues to create an owned SVOD which has terminal value.”

Overall, Wall Street remains bullish on CBS' stock. Two-thirds of analysts covering the stock have a "buy" or equivalent rating on it; the rest have a "hold" or equivalent view.