CBS Corporation is now Neutral

We recently downgraded our recommendation on CBS Corporation ( CBS - Analyst Report ) , a diversified media conglomerate, to Neutral with a price target of $40.00. Earlier, we had an Outperform view on the stock.

Having emerged out of parent company, Viacom in 2005, CBS Corporation’s operating divisions comprises CBS Television Network, CBS Interactive, Showtime, Local Television and Radio Stations, CBS Outdoor and Simon & Schuster (publishing).

Dip in Top Line

CBS Corporation witnessed a fall in the top line during the second quarter of 2012. Total revenue of $3,476 million dropped 3% over the prior-year quarter due to difficult year-over-year comparisons. The prior-year quarter, benefited from a multi-year digital streaming contract and the NCAA men’s basketball championships, which was aired in the first quarter of the current year. Total revenue also fell short of the Zacks Consensus Estimate of $3,543 million.

Due to its exposure in publishing, radio and television broadcasting, and outdoor billboard businesses, CBS remains highly susceptible to the advertising market. The deterioration in the economy of the major markets such as Los Angeles, New York or Chicago, where the company operates may result in a fall in advertising demand, and in turn, in the company s revenue generating capabilities.

Advertising revenue declined 3% to $2,142 million, whereas content licensing and distribution revenue slipped 8% to $816 million. However, affiliate and subscription fees rose 8% to $465 million.

Earnings Move Upwards

CBS Corporation’s focus on containing costs, building operating efficiencies and taking strategic measures, have together helped the company post better-than-expected second-quarter 2012 bottom line results. The company posted earnings of 65 cents a share that beat the Zacks Consensus Estimate of 58 cents and jumped 12% from the year-ago quarter.

Strategic Initiatives to Drive Growth

CBS Corporation has marked its presence virtually in every sphere of media and entertainment through its divisions, and remains focused on creating a business environment that nurtures diversity. Management remains optimistic and expects growth momentum to continue in fiscal 2012 based on reverse compensation from affiliates, strong demand of its content and online video streaming, retransmission consent, and political advertising. Management expects reverse compensation to surpass $100 million in 2013.

The company is striving to add diverse revenue streams to hedge against economic cycles. The retransmission, affiliate and online distribution fees have been non-advertising-driven revenue and will become a significant growth driver. CBS is eyeing more than $250 million in retransmission fees in fiscal 2012.

Closing Comment

The above analysis supports our unbiased view on the stock. CBS Corporation, which competes with News Corporation ( NWSA - Analyst Report ) and Walt Disney Company ( DIS - Analyst Report ) , holds a Zacks #2 Rank that translates into a short-term ‘Buy’ rating, and well defines the company’s endeavors undertaken to keep afloat in an economy that is still grappling to regain its lost momentum.