It has been about a month since the last earnings report for CBS (CBS - Free Report) . Shares have lost about 2.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is CBS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
CBS’ Strong Content Slate Aids Q4 Results
CBS Corporation delivered fourth-quarter 2018 adjusted earnings of $1.50 per share that increased 25% from the year-ago quarter. However, the figure missed the Zacks Consensus Estimate by 3 cents.
Revenues increased 2.6% from the year-ago quarter to $4.02 billion. However, the figure missed the consensus mark of $4.16 billion.
Revenues by Segment
Entertainment revenues (70.4% of total revenues) declined 0.8% to $2.83 billion due to lower content licensing and distribution revenues (down 14%). However, affiliate and subscription fee revenues grew 17% due to increased revenues from station affiliation fees and virtual MVPDs and growth in CBS All Access.
Advertising revenues were up 2% owing to Network 10 revenue growth, offset by the absence of Thursday Night Football show in the reported quarter.
CBS Television Network was again ranked as the number one TV network owing to its content strength including unique sports content. The network also has five of the top 10 TV series on its platform. Moreover, due to the recent Grammy’s event, about 20 million viewers accessed CBS Television Network. CBS All Access witnessed 24% growth in unique viewers and time spent on the platform also increased.
CBS is also benefiting from CBS Sports Network as it showcases sports content like NCAA Basketball Championship, The Super Bowl, The Masters and the upcoming event - The PGA Championship in May. These events are likely to boost ad revenues and drive subscriber growth, which is a positive. Notably, CBS Sports HQ saw growth in time spent by users and increase in new subscribers owing to the popularity of The Super Bowl.
Cable Networks’ revenues (13.7%) increased 8.5% to $551 million due to increased revenues from the boxing pay-per-view event on Dec 1, 2018 between world champion Deontay Wilder and British star Tyson Fury. Higher international licensing sales and growth in Showtime subscribers also aided results. Premier boxing events and originals like Ray Donovan, The Chi, Shameless and Billions were the reason behind Showtime’s subscriber growth. Notably, the service had 27 million subscribers in 2018.
Additionally, the series, Escape at Dannemora, which was released in fourth-quarter 2018, won the Best Actress awards from this year’s Golden Globes.
Publishing revenues (5.4%) of $218 million declined 7.2% due to decline in print book sales. The bestselling titles in fourth-quarter 2018 were Queen of Air and Darkness by Cassandra Clare and Elevation by Stephen King.
Local Media revenues (13.9%) climbed 24.7% to $561 million primarily due to higher retransmission and subscription fees (up 11%) and increased advertising revenues. Higher political advertising sales from the U.S. mid-term elections led to higher advertising revenues. Notably, healthcare and entertainment advertising revenues also witnessed strong growth.
In the reported quarter, CBS launched CBSN New York, a local direct-to-consumer streaming service. The service is expected to grow to other markets starting with Los Angeles.
Revenues by Type
Advertising revenues (46.5% of total revenues) increased 7.3% from the year-ago quarter to $1.87 billion. Growth was driven by higher political advertising sales from the 2018 U.S. mid-term elections. Notably, the growth was achieved even with the unavailability of Thursday Night Football, which aided fourth-quarter 2017 ad revenues.
Content licensing & distribution revenues (26.3%) were down 11.3% to $1.06 billion due to timing of international licensing sales. The decline was also due higher domestic sales that were recorded in fourth-quarter 2017.
Affiliate and subscription fee revenues (25.5%) increased 11.3% year over year to $1.03 billion. A surge in retransmission revenues, increased revenues from direct-to-consumer (DTC) streaming services (up 53%) and virtual multichannel video programming distributor (MVPDs) led to overall growth of affiliate and subscription fee revenues. Notably, CBS All Access and Showtime subscribers grew 7% year over year in the reported quarter.
In the fourth quarter, adjusted operating income increased 10.1% from the year-ago quarter to $837 million due to increased revenues and lower programming costs. Operating margin expanded 140 basis points (bps) to 20.8%.
Segment wise, Local Media operating income surged 71.9% year over year to $239 million due to higher revenue growth. Publishing increased 2.2% to $46 million due to decline in production costs.
However, Entertainment operating income decreased 5.8% year over year to $438 million due to lower revenues generated and increased investments in content. Launch of ET Live and 10 All Access in Australia was also the reason for the decline.
Additionally, Cable Networks operating income decreased 6.8% year over year to $193 million due to increased investments in programming including Escape At Dannemora.
Balance Sheet & Cash Flow Details
As of Dec 31, cash and cash equivalents were $322 million compared with $182 million as of Sep 30. Long-term debt was flat sequentially at $9.47 billion.
Adjusted free cash flow in fourth-quarter 2018 was $180 million compared with $102 million in the year-ago quarter. Adjusted free cash flow in 2018 was $1.26 billion compared with $989 million in the year-ago quarter due to increase in affiliate and subscription fee and lower income tax paid offset by increased investments in content.
In the quarter under review, CBS bought back 2.1 million shares for $100 million and for the year it bought back 11.5 million shares for $600 million.
CBS, which entered into an agreement to sell its Television City production studios to Hackman Capital Partners for about $750 million in the reported quarter, closed the transaction on Jan 31, 2019.
CBS All Access and Showtime OTT had 8 million subscribers on a combined basis in 2018. CBS first planned to achieve the 8 million mark by 2020, which was advanced to 2019 in third-quarter 2018. Owing to the company’s content strength CBS expects both the platforms to have 25 million subscribers by 2022.
Notably, CBS international DTC subscribers and subscribers from ad supported DTC channels including CBS Sports HQ, CBSN, ET Live and CBSN Local are excluded in the 25 million subscriber count that the company expects to achieve by 2022.
Additionally, as CBS All Access premium content is driving subscriber base the company introduced four original shows in 2019. Moreover, Showtime is expected to produce additional 30% hours of original programming in 2019.
Apart from creating content for its DTC platforms, CBS is increasingly licensing content to other over-the-top (OTT) providers. The company licensed Star Trek: Discovery to Netflix’s international platforms as the series is exclusive to All Access platform in the United States. Additionally, Disney stated that it is buying content from CBS TV Studios for its upcoming streaming service, Disney+, to cater to consumer demand.
Moreover, Apple ordered a series, Swagger, based on basketball player Kevin Durant’s early life. The series is expected to be co-produced by Imagine Television, Durant’s Thirty-Five Ventures, and CBS Television Studios. Notably, Apple may launch its streaming service in April or early May.
Moreover, CBS stated that its studios will create around 76% original series in 2019, up 17% year over year.
CBS expects Local Media revenues in high-single digits. Demand for national advertising is expected to be about 25%.
The company’s OTT services — CBS, CBS All Access and Showtime — will continue to showcase new content. CBS noted that it will continue to invest in content, technology and marketing. Additionally, the company expects its content licensing activities to increase owing to its content strength.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -6.74% due to these changes.
Currently, CBS has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
CBS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.