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Morningstar | CBS Posts an In-Line 3Q; All Access Launching in Australia

CBS reported an in-line third quarter as revenue and EBITDA met expectations. The firm continues to benefit from its revenue diversification efforts including All Access which will be launched in Australia this quarter. With the distraction of a forced reunion with Viacom now off the table for at least two years, we expect that the company will continue to execute well even without longtime former CEO Les Moonves. We are maintaining our narrow moat rating and fair value estimate of $71. With the stock trading in 4-star range, we believe current prices offer an attractive entry point for investors.

Overall revenue grew 3% year over year to $3.3 billion as the growth at the entertainment, publishing, and local broadcasting segment more than offset the weakness at the cable networks. Entertainment growth of 19% year over year was driven by ongoing strength in advertising and content licensing (up 16%) and affiliate fee revenue (up 32%). The affiliate fee is coming from not only reverse comp and All Access, but also from the new OTT pay TV platforms. Cable revenue fell 32% versus the same period last year which included the massive Mayweather-McGregor pay-per-view fight. Adjusted operating margin fell to 21.1% versus 22.2% a year ago as revenue growth in high margin areas such as retrans and reverse comp continues to be more than offset by the increased content spending at both CBS and Showtime and the increased marketing expenses for the direct-to-consumer offerings.

While the ousting of former CEO Les Moonves occurred about two months ago, the rumors about a possible permanent replacement have just recently begun to swirl around. The board has retained an outside search firm to find a find a new leader. Current acting CEO Joe Ianniello is a potential candidate for the position, but he may be tainted by his longtime association with Moonves and his participation in the lawsuit against the Redstone family. Additionally, Ianniello has never served as a CEO or a leader of a network and has limited experience in programming, having come up in financial side of CBS. However, Ianniello has demonstrated some strength by promoting a number of executives to new roles including elevating Showtime CFO Christina Spade to the overall CFO role and appointing Showtime Chairman and CEO David Nevins as the Chief Creative Officer for the entire firm. Nevins is also rumored to be up for the permanent CEO role, so the promotion could be viewed as a case of keeping one’s enemies closer.

While there are a number of intriguing names in the rumor mill, we believe that the board may be hamstrung in finding a suitable candidate outside of the organization due to the specter of a forced merger with Viacom in two years. Any potential candidate would recognize that Shari Redstone appears to think very highly of Viacom CEO Robert Backish who would be the favorite to lead the combined company. Additionally, any CEO candidate would need to feel comfortable with not only filling the shoes of Moonves, but also cleaning up the mess created by his scandals and repairing the relationship between CBS and its controlling shareholders led by Shari Redstone. These hurdles lead us to believe that an internal candidate is more likely than an outsider to win the permanent CEO role.