CBS also owns book publisher Simon & Schuster and an outstanding interactive media division, which runs tech-site CNET and review aggregator Metacritic. Also, the CBS Outdoor division does more than $2 billion in billboard advertising sales a year. Exposure to this integrated media strategy is offered by few U.S. equities. CBS has more than doubled net income and earnings per share, on a trailing 12-month basis. Adjusted fourth-quarter earnings advanced 84% to 46 cents, exceeding consensus by 6%. Sales grew 11% to $3.9 billion, beating consensus by a more modest 1.4%. The operating margin rose from 12% to 16%.
Morgan Stanley expects CBS to benefit from a recent deal with Netflix (NFLX) and climbing advertising spending. Also, its near-peak margins, with a gross spread at 38%, provides opportunity for expansion and brand investment. CBS, which has a market value of $17 billion, is expected to buy back shares, but maintain its dividend, in 2011 and 2012. Morgan Stanley's base-case scenario has CBS rising to $27.
That outcome is consistent with "a steady ad recovery", or a roughly 1% increase in ad sales, and a billion worth of share repurchases in 2011 and 2012 as margins expand by roughly 150 basis points. Its bull case has the stock rising 38% to $34, provided ad sales stretch 3% and the board purchases $1.5 billion of stock during 2011 and $1.5 billion in 2012.
The bear-case target is $18, contingent upon multiple contraction, a decline in ad sales of roughly 2.5% and just $500 million of buybacks in 2011. One notable risk to the bullish thesis is an NFL lockout, which is looking increasingly likely as negotiations between team owners and the players association have broken down in recent weeks due to a dispute over upfront revenue desired by team owners. If this issue isn't resolved soon, the 2011-2012 season is in jeopardy, as are CBS's fall schedule and broadcasting profits.At quarter's end, CBS held $480 million of cash, down 33% year-over-year, and $6 billion of debt, down 14% year-over-year, for a quick ratio of 0.9 and a debt-to-equity ratio of 0.6. Although other analysts have a net-positive view of CBS, which receives 15 "buy" recommendations, 10 "hold" calls and no "sell" ratings, the median upside target, at $26.25, suggests a modest return during the next 12 months. Yet, the stock is cheap on the basis of relative valuation, commanding a forward earnings multiple of 13, a book value multiple of 1.7, a sales multiple of 1.2 and a cash flow multiple of 9.6, 52%, 39%, 48% and 68% peer discounts. Its PEG ratio, calculated by dividing the trailing P/E by the terminal earnings growth forecast, of 0.5 signals a 50% discount to fair value.
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