CBS Encouraged by Bottoming in Ad Market

“CBS had interesting comments. It wasn’t a great report if you just look at the earnings revenues were down. Moonvez said the worst is behind us and thought advertisers were slowly returning.” — CNBC’s Squawk on the Street 8/7/2009

CBS Corporation (NYSE:CBS) has been dealing with the slowdown in ad sales since before the recession started, but after the company reported a slightly better second quarter than was anticipated things are starting to look up. Shares have surged ahead as much as 31% today, as Wall Street analysts from Morgan Stanley (NYSE:MS), JP Morgan (NYSE:JPM), Jefferies Group (NYSE:JEF) and S&P have all boosted their price targets on the stock. Excluding one-time items CBS was able to make about 8 cents per share versus expectations of seven cents, and revenue declined about 11%.

Profits have slipped hugely from the period a year ago, but far more important were the company’s comments on encouraging signs in the advertising industry. “The back half of the year will be considerably stronger than the first,” CBS’s CEO Les Moonves said on a conference call, he is seeing “early signs of a recovery.” This is a good sign for all companies tied to ads but perhaps CBS more than any others. CBS derives 65 of revenue from advertising and does not have the expansive family of cable television networks to fall back on as does Time Warner (NYSE:TWX) or its former parent company, Viacom (NYSE:VIA). Having a stable revenue stream of subscription fees helps to insulate competitors, while CBS is ultimately more tied to the ad market. CBS also did a good job of driving ratings up, as the only major network to gain prime-time viewers, which should help endear it to advertisers.

We are reiterating our Fairly Valued or neutral stance on CBS shares after today’s meteoric rise. There is no doubt that these results are more upbeat than anything the company has said recently, but there has been too much destruction to earnings to ignore, as ad sales have been so weak. With CBS now approaching $11 per share, we will be reviewing this stock for a possible downgrade going into next week. We recommended buying shares when they were down in the low single digits, but it has now tripled off of the lows. To buy in off of this huge day would be more of a speculation than a long term investment, in our view. Shareholders should be pleased with the progression of the company, and the fact that the better economy is lifting ad rates from extremely low levels. However, the price is no longer attractive to us even with improved operating conditions. By our methodology, a price of somewhere around $7 to $9 would be a more reasonable entry point.

CBS Encouraged by Bottoming in Ad Market

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