CBS ($25.84) <CBS Corporation > by scrooge833

**blast_investor** Wed May 31, 2006 2:23 pm

CBS ($25.84) <CBS Corporation > by scrooge833
2/6/2006 5:53:00 PM CBS ($25.84) <CBS Corporation > by scrooge833 (from Value Invesor Club)
Description:

CBS’s value presents a 50% gain than its trading price with minimal downside risk.
Largely because of more interest in its much more glamorous sibling Viacom in the
most recent spin-off, uncertainties facing the broadcast tv and radio industry, CBS’s
allegedly “no-growth” stock but basket of attractive businesses (40+% Return on
deployed Capital) is trading at an attractive valuation at a little over 10 times EBITDA
Less Capex, 7 times next year’s cash flow, and you also get a 2 percent dividend
yield. Furthermore, on a comparable basis, even if you adjust for the parks/publishing
segment which deserves a lower multiple, you are still getting this basket of
business at less than 8 times EBITDA Multiple when each of this business segments,
(radio, tv, or outdoor) trade at 10-13 times EBITDA Multiple.

CBS owns 4 business segments: Television, Radio, Outdoor and Parks/Publishing.

The Television segment consists of the Broadcast Networks (CBS and UPN television
networks), Showtime Networks (Showtime, The Movie Channel, FLIX), 39 owned
television stations, and the television production and syndication business called CBS
Paramount Television and King World Productions. On the aggregate, this business generated
EBITDA margins of 18-19% under the umbrella of Viacom. The Paramount Network has
not been making money for CBS but this should become profitable starting fall of this
year. On November 3, 2005, CBS acquired CSTV Networks (College Sports TV) for
10.21 million shares of CBS Class B common stock.
http://www.cbscorporation.com/news/prdetails.php?id=142
In January 2006, CBS announced a joint venture with Warner Brothers to form a new
fifth network, called the CW Network. This combined network will have access to 48%
of the households and through affiliation deals, could reach 95% of the country by
its scheduled September launch.
http://www.cbscorporation.com/news/prdetails.php?id=173
I think this segment is where the market is missing the potential growth. I think
they can increase their operating margins by 8 to 10 percentage points over the next
few years. On a 10-11 billion revenue base this translates to another billion or
more of value. See management on where the growth in TV segment can come from.
Comparables in this space trade at 12.5 to 17 times EV/EBITDA multiples. They
include EW Scripss, Hearts-Argyle, Univision, Entravision. The higher growthy names like
the Hispanic stations trade at the higher end
multiples.

The Radio segment owns and operates 178 radio stations in 40 U.S. markets trough
CBS Radio. This business generated EBITDA margins in the 48%+ in the pre-spinoff
era. This segment of the business faces the highest uncertainty risk at the moment. It
lost the Howard Stern show to Sirius satellite. It faces competition from Ipod,
Satellite radio among many other headwinds. In response, CBS is trying to find a
replacement for Howard Stern and has announced deals to carry Cramer’s “Money Show”,
among others.
Comparables in this space trade at 12 to 14 times EBITDA multiples. They include
Clear Channel, Cox Radio, Citadel Broadcasting, Cumulus Media, Radio
One.

The Outdoor segment displays advertising on billboards, transit shelters, busess,
rail systems (in-car, station platforms and terminals), mall kiosks and stadium
signage. This business generated 25% EBITDA margins in the pre-spinoff era. By far, this
business arguably faces the least amount of well-known uncertainties. Comparables
such as Lamar, Clear Channel trade at 13 to 13 times EBITDA Multiples.

The Parks/Publishing segment includes Simon&Schuster, which publishes and
distributes consumer books (Simon & Schuster, Pocket Books, Scribner, The Free Pres) and
Paramount Parks, which operates 5 themed parks in the U.S. and Canada with 12.5 million
guests annually. CBS says there are many interested parties in its parks operations
and it expects to complete its announced intended divestiture of Paramount Parks
division in the second half of 2006.
http://www.cbscorporation.com/news/prdetails.php?id=175
This segment represents less than 10 percent of revenues and less than 5 percent
of EBITDA.

On January 5, 2006, CBS acquired CSTV Networks (College Sports TV) for 10.21
million shares of CBS Class B. CSTV reaches about 15 million cable and direct-broadcast
satellite households, having distribution agreements with Comcast, DirecTV, Time
Warner, Charter, Cox and EchoStar’s DISH Network. The web site, www.CSTV.com, has more
than 7.5 million monthly unique visitors as of September 2005. CSTV’s founders were
the founders of Classic Sports Network which was bought by ESPN for $200+ Million
dollars back in 1997. Combined, CBS Sports’ online audience will have 19 million unique
users, more than any other online medium.

Attractive Economics

While not as good as in the past, the economics of the radio, tv and the outdoor
segments are still very attractive. Maintenance capex is minimal and total capex
averages 12-15% of sales. about On the whole including the parks/publishing and the
outdoor segments, these businesses return 40+% EBIT on capital (net fixed assets +
working capital). If the divestiture of the themed park business is completed, the
returns should be higher.

Unrecognized growth opportunities
Less well recognized are the potential growth opportunities: high-tech displays
(LCD’s,etc) for billboard space, targeting internet audience with CSTV and live
simulcasts on TV and internet such as the NCAA March Madness, CBS deals to sell CSI
episodes on the internet and over Ipod, Cramer’s money show will be carried on CBS Radio
Stations, etc. The media pie continues to grow 6 to 8% over the next three years.
If anything, political advertising should cause a spike in ad revenues in 2008.

Management
Les Moonves's team has a very good reputation as a passionate programming
executive. You have the talent, the incentive, and the chemisty. This is a team that has
worked together for many years. The founders of Classic Sports who are joining CBS
are also very well regarded. Les Moonves took CBS’s TV to the #1 spot in prime time
ratings and #1 in profitability and has been in this business for many years. The
next target is the CBS’ news business. Sean McManus, who led the resurgence of CBS
Sports, is now running the news group. Les is also focused on making Showtime more
profitable. Showtime was not the focus of Viacom in the past. Finally, Les is aiming
for a per-subscriber, per-month fee from cable operators to retransmit the CBS signal
in their systems. If CBS can get only 20 to 40 cents per sub, this would translate
into 175 to 350 million annually in incremental profits. In the few weeks that CBS
has been independent, Les has made a few promising moves such as the announcement
to divest the parks, the joint venture deal with Time Warner for the CW Network, the
carrying of the Money Show on the Radio Stations. In other words, Les is not
standing pat. You are getting this unrecognized growth for free in my opinion. To get a
subjective opinion of management, click on this link.

http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=99462&eventID=1198287

EBITDA EST REV ESTIMATE MARGINS
My EBITDA Estimates: 2006E 2007E 2006E 2007E
Television Segment* 1980M 2240M 9750M 10200M ~20-22%
Radio 920M 930M 2000M 2100M ~44-46%
Outdoor 510M 540M 1900M 2000M ~26-27%
Parks&Publishing** 120M 123M 1200M 1230M ~10%
Corporate -230M -260M
Consolidated EBITDA 3,300M 3,573M

(* Breakdown of Television Segment
2006E 2007E
Broadcast Networks 485M 580M
Television Stations 820M 850M
TV Production&Syndication 380M 400M
Showtime Cable TV Network 350M 370M
CSTV Cable TV and web sites 0 25M )

(** Assumption is that the Parks do not get sold, but CBS announced they are
planning to get sold. I assume a 6 times multiple in this analysis and I think this
multiple provides margin of safety because the parks will probably sold for equal or
higher multiple)

Valuations:

You are currently paying for around 7.7 times 2006 EBITDA, 7 times 2007 EBITDA.
Equivalently you are getting a yield of around 9.5% on EBITDA less Maintenance Capex.
This business generates returns on capital (net fixed asset + net working capital)
in the 40 percent range, after CBS sells its themed parks. I believe that this
valuation gap of a 50 percent increase (to 39$ a share) could be closed within 12 months
as any of the catalysts mentioned below start coming to fruition. At worst, as Dec.
31 2006 comes closer, and people look out a year from then, the chances of this
valuation gap closing gets higher. To get to this 39$ price, I assume matrix values of
multiples of 2007 EBITDA of 10x, 9x, 12x, 6x for the Television, Radio, Outdoor, and
Parks/Publishing Segment respectively.

Risks
The nature of TV ratings is that CBS’s sustainability in the #1 spot is not
guaranteed.
If I am wrong about the management’s ability to execute, then the upside is not
there, but even so, it would be highly unlikely that you will lose money at this stock
price.

Catalyst:

Quarterly results are reported
Sale of non-core assets such as themed parks in the 2nd half or earlier
Further rationalization of the business
Incentivized management who get to execute what they knew all along needed to be
done while operating under the Viacom umbrella for the last 5 plus
years
Dividend hike
Share buybacks one year out