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As CBS' Cash Shrinks, So May Its Stock

The media giant has enjoyed big gains, but there's little left to provide more upside.
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Memo to


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shareholders: Enjoy the view while it lasts.

Shares of the New York broadcasting conglomerate have climbed a mountain of cash to deliver some of the best returns in old media.

Now the broadcast conglomerate is reaching the mountain's summit, and it looks as though the only place to go from here is down.

Even with the recent market selloff amid a global credit scare, shares of CBS are up 24% since it split from


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at the beginning of 2006.

The performance partially vindicates Sumner Redstone's decision to divide his media empire, but shares of Viacom, down 6% since the split, are still lagging. Investors are skeptical about the content giant's ability to monetize its assets as Internet media distributors such as


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suck up the online ad dollars that excite growth-hungry investors on Wall Street.

CBS has its own issues in adapting to the digital age, but its stock performance has been powered by the company's cash hoard, which ballooned from $1.6 billion at the end of 2005 to a peak of $3.4 billion at the end of the first quarter of this year. Along the way, the company periodically whetted Wall Street's appetite by distributing the cash to investors through

dividends and share buybacks.

In a recent research note, Sanford C. Bernstein analyst Michael Nathanson estimated that the $3 billion in accelerated share repurchases announced by CBS this year will whittle its cash pile down to $1.8 billion by year's end -- a level not seen since early 2006.

Nathanson said that while corporate and financial activities such as asset sales and share repurchases "have dominated CBS' stock over the past few months, we believe these issues have largely played out and attention will shift back to business fundamentals, which look increasingly challenged."

He raised his estimates for the company's earnings per share in 2007 and 2008, citing the early timing of its latest $1.6 billion in accelerated share repurchases scheduled for completion by the end of this year. He also maintained his market-perform rating on the stock, but he said the string of upside surprises at CBS may be at an end, "which is a risk to the stock."

Roughly 72% of CBS' total revenue comes from U.S. advertising, which is sensitive to swings in the economy. Economists have raised the odds of the U.S. economy entering a recession as fallout from the national housing slump spills over into other areas of the economy. As for the advertising market, TNS Media Intelligence reports that a slowdown is already under way.

The research firm recently reported that advertising spending slipped by 0.2% in the second quarter and 0.3% for the first half of the year. That marks the first time since 2001 -- the year of 9/11 and Enron -- that advertising spending fell for two consecutive quarters.

About 34% of CBS' earnings before interest, taxes, depreciation and amortization is tied to television advertising, where audiences are in decline, thanks to competition from Web media, video games, DVDs and digital video recorders that allow consumers to skip commercials.

Also, 27% of its EBITDA comes from radio broadcasting, where CBS has lost shock-jock stars Howard Stern and Don Imus, and it faces tough competition from satellite radio, Internet radio and the proliferation of


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If the cash story is coming to an end at CBS, these forces will likely take a toll on the company's stock price. Right now, it's trading at a

multiple in line with its media peers, but Nathanson predicts it's poised to show the slowest earnings growth over the next three years of media companies in his coverage.

"While CBS has long been considered the cheapest stock in the media sector on free cash flow, based on our calendar 2008 free cash flow estimates that is simply no longer the case," he said. "

Time Warner



News Corp.

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each have higher free cash flow yields on calendar 2008 estimated free cash flow than CBS."