Buying CBS

CBS Class B stock (CBS/NYSE) was purchased on Wednesay morning as a full position in the portfolio. The shares closed the day at $25.61 each. This blog first mentioned the possibility of buying CBS last June when it was first announced the company would be spun off from Viacom in early 2006 -- first on June 14 and then again on June 15.

CBS is undeniably cheap. It sells for 0.53 times book value and 0.45 times sales. The market cap is $10.7 billion and there are approximately 419 million shares outstanding. The dividend yield is 2.5%.

As you know, CBS was in fact spun out of Viacom at the beginning of the year. The company has valuable assets, including the CBS television network, a group of 39 TV stations, CBS Radio, a large billboard business, Showtime, book publisher Simon & Schuster and (for now) amusement parks. Wall Street has deemed the company a “no-growth old-media” outfit, doomed to perpetually slow growth.

But the CBS management team, led by Les Moonves, looks to be a top-notch bunch committed to boosting profitability and rewarding shareholders.

CBS generates ample free cash flow -- about $1 billion annually -- and just announced it was raising the quarterly dividend 14% to 16 cents a share. Some analysts predict that the company will likely begin repurchasing its stock in 2007, but that increasing the dividend over time is a higher priority.

Further good news is that CBS looks to be divesting itself of “non core” assets. The company recently announced plans to sell its amusement parks division in the second half of this year. It’s estimated this division would go for $640 million or more. Another piece that could be sold off would be Simon & Schuster, though that’s just speculation.

Put simply, I see CBS as being cheap as all get-out and that investors buying the stock at current prices will be rewarded in the years to come. It may be like watching grass grow or paint dry. Yet a combination of share price increases, dividends and stock buybacks should give the portfolio a decent return on the investment.

What could go wrong with this investment? My view is the biggest “risk” with owning CBS stock is that it becomes dead money. That the “no-growth old-media” worries turn out to be the case. There are problems. Bears will point to the ratings dominance of CBS TV waning, the loss of Howard Stern from CBS Radio, and the fact that 70% of revenues come from advertising -- leaving the company vulnerable to any weakening in the economy. Not to mention many investors just plain view Viacom’s assets (such as MTV, Nickelodeon, and Paramount studios) more favorably anyway.

But for my money, the pluses outweigh the minuses with CBS. Just be sure to do your own due diligence before doing any buying.

UPDATE: I should have pointed out that book value and other information on CBS was obtained from WSJ.com and dated September 30, 2005. Apologies to all for not stating that in the original post.

Comments

[Earvin Johnson]

Good luck on CBS, funny because its something I've been looking at also. Very cheap stock with great cash flow and a management team that's interested in returning cash to shareholders in the form of stock buybacks and increased dividends. What's not to like?

[John]

Earvin,

Many thanks for wishing me luck on this. You wished me luck with DECK and it turned out fine, so I'd like to see the same with CBS.

CBS looks to me like a stock with very litle downside. Anything can happen in the short term, of course, but I think someone can buy it today and forget about it. Then mark your calendar for 3 or 4 years from now and see a decent gain. Yet who knows?

[Milind]

Thanks for a nice post. I also recommended a purchase of CBS. Earnings are expected to be announced next week and I hope the company's value will become apparent to the market.

[JT]

I am curious why you wouldn't wait until after the next quarterly report on Feb 23, considering the real risk is that it is dead money, and might trade down on any report as other holders who participated pre-break up want to only own the "sexier" MTV business?

[John]

Milind,

Thanks for your kind words. I, too, want/believe CBS' true value will be realized by the market. But I'm not expecting it right away (I never do).

JT,

You're right. There is a risk that, depending on the results announced, CBS could trade down. Or up for that matter. But I'm looking at this as a 3-5 year play, so what happens in the short term isn't too much of a concern, though I realized that could be to my detriment.

[Ryan]

John,

I'm not seeing where CBS is trading at .5x book value.

I show they have ~800 million shares outstanding. With a current price of ~$25/share that equates to $20 billion.

Per the Registration Statement filed on 2/1/2006 they have $30 billion in book value for Pro Forma CBS.

As a double check, I looked at both Merrill Lynch and Morningstar and they show Market Cap around $20 billion (which foots with the Registration Statement).

Could you clarify?

Thanks,
Ryan

[John]

Ryan,

The figures stated in the post were obtained from WSJ.com, which they get from Reuters, and are dated 9/30/05. I meant to say that and forgot -- so thanks for reminding me.

[Ryan]

John,

Thanks for the reply.

The WSJ numbers are for the whole company prior to the spin-off. I don't know where the WSJ is getting their share count number from, though. There's ~800 million shares out, not 419.

I don't have an opinion on CBS one way or the other (it looks interesting and worth more digging).

But, I was confused about the numbers, thanks for clarifying.

-Ryan

[Ryan]

Just to fllow up one last time.

I don't think you're doing a service to your readers by leaving erroneous information up on your blog.

You didn't purchase CBS at .5 times book value (leaving aside for a moment that almost 100% of book value is goodwill), nor is CBS at a $10 billion market cap (it's $20 billion).

Which further throws off your price to sales ratio.

You imply their revenue is close to $20 billion, but it's probably closer to $15 billion.

Rather than .45 times sales, you bought it more around ~1.35x sales.

None of this is meant to imply that it was a bad purchase, or that you won't do well going forward. I sincerely hope you do.

But, I also sincerely hope that you prefer that your blog contain accurate information.

Best,
Ryan

[John]

Ryan,

I certainly don't want anyone to get mislead by reading this blog. I will post your points in a separate posting.

I've re-checked WSJ.com and Barron's Online and they both jive with what I originally posted. They get their figures from Reuters. They readjust their per share figures every day, based on the closing price. I believe the figures they use from 9/30/05 are the parts of the business that became CBS. I do not believe they're using the entire Viacom business, pre-CBS spin off, for CBS.

I emailed Reuters about this and have not yet received a reply.

I also checked Morningstar this afternoon, and they showed CBS going for half of book value. I think the price-sales ratio was about what I had as well.

I do appreciate your comments, Ryan. And, again, I do not want to mislead readers. I'm REALLY glad the company is announcing results this week. :-)

[ryan]

John,

Thanks for the reply.

I know you're not intentionally trying to mislead anyone. I just wasn't sure if you were looking into the matter.

It seems that you are, which is great.

Part of the problem is that CBS is basically old Viacom (i.e. technically MTV etc. were carved out of what we are now calling CBS). So, a lot of these data services are taking their numbers from what was Viacom.

But, I could see exactly where the WSJ Online (or Reuters) was getting their 9/30/05 numbers from. And it was from the old Viacom. Which makes sense, that's what the last 10-Q reflected.

Essentially there are no numbers for these guys to pull from; other than the Registration statement filed in conjunction with the spin-off. But, there not set up to pull numbers from such filings.

And, even that Registration statement only had a nine months Income Statement for 2005 and no Statement of Cash Flows.

In a sense the data-providers are correct. CBS on 9/30/2005 had the book value that the WSJ and Morningstar are reflecting.

However, they carved out their cable and movie studio assets since then. So, the numbers being shown by them aren't relevant to investing in CBS today.

You can pull up an old Viacom 10-k and see that the numbers foot to what Morningstar is showing. Which is fine, it just isn't relevant to your investment going forward.

Guess it'll all be clear on Thursday ;-)

But, look for Sales on a trailing-twelve months basis to approximate $14-$15 billion and Shareholder's Equity to be about $30.5 billion plus/minus their net earnings and dividend for the 4th quarter.

See the filing dated 2/1/2006 labeled S-3ASR for some pro-forma statements. Or, for more in-depth info on the whole spin-off see the 11/23/2005 filing labeled S-4/A.

In any event, I hope you do well on the investment and I truly enjoy - and appreciate the time and effort put into - your blog.

Best,
Ryan

[John]

Thank YOU, Ryan. Comments and emails from knowledgeable pros like you make this a wonderful experience.

[William David]

what is the difference between CBS class A shares and class B? Other than voting rights? Is one more valuable...is one better to invest in than the other?

[John]

William,

Most media-related companies have two classes of shares, with one class having more (or total) voting privileges. Sometimes one class (usually the non-voting class) trades at slight discount.

I own the CBS Class B and am comfortable doing so. If someone wanted to own the Class A shares, or divide their CBS holding across both classes, I couldn't see a problem with that.

Thanks for reading.