CBS (NYSE:CBS) made financial headlines this week over its battle royale with Time Warner Cable (NYSE:TWC) concerning distribution fees. Nevertheless, CBS’s stock has performed admirably this year — up 34 percent in the past six months. Can CBS continue its impressive run? Let’s use our CHEAT SHEET investing framework to decide whether CBS is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
C = Catalysts for the Stock’s Movement
In addition to its seminal series, CSI and NCIS, which enjoy both strong international and domestic audiences, CBS has continued to develop hits for its namesake network channel. These shows include Big Brother, The Big Bang Theory, and Under the Dome. According to Nielsen, these were three of the top 10 most-watched network TV shows last week. CBS continues to experience growth within its Showtime Networks — revenue increased 6 percent in the first quarter on a year-over-year basis. While Showtime continues to face competition from Time Warner’s (NYSE:TWX) HBO, the network has recently expanded its distribution by inking key deals with online streaming services such as Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX).
E = Earnings are Increasing Year-Over-Year
CBS reported first-quarter earnings of 69 cents a share — up an impressive 28 percent from the previous year’s quarterly earnings of 54 cents. CEO Leslie Moonves was optimistic, declaring that the first quarter of 2013 “was the most successful quarter in [its] Company’s history.” He cited ad revenues from the Super Bowl, the Grammys, and the NCAA men’s basketball tournament as some of the primary reasons for the company’s success. Advertising revenues were up 8 percent from the previous year’s quarter. While the second quarter does not have the same caliber of entertainment events for which to generate viewership and ad revenue, CBS should see healthier gross margins as it divests its lagging billboard business, Outdoor Americas.
|2013 Q1||2012 Q4||2012 Q3||2012 Q2||2012 Q1|
|EPS Growth YoY||27.78%||9.32%||20.00%||12.07%||86.21%|
|Revenue Growth YoY||6.43%||2.99%||1.58%||-3.07%||8.15%|
*Data sourced from YCharts
E = Excellent Performance Relative to Peers?
CBS stacks up well to its chief competitors, Time Warner (NYSE:TWX) and Disney (NYSE:DIS). The company has a trailing price-to-equity ratio of 20.53 — slightly higher than that of Time Warner but much lower than that of Disney. CBS has the most attractive return on equity of the three at 17.56 percent, implying that management is performing well in maximizing shareholder profitability. While CBS has the highest debt-to-equity ratio of the group, it has an interest coverage ratio of over 7, meaning that the company’s earnings can cover its interest expense seven times over. CBS is is poised to grow at a similar rate to Disney and Time Warner over the next five years. The company pays a modest dividend of 0.90 percent; however, with a payout ratio of only 18 percent, the company has room to increase its dividend in the future.
|Growth Est (5 yr.)||12.20%||12.43%||12.33%|
*Data sourced from Yahoo Finance
T = Technicals on the Stock Chart are Strong
CBS is currently trading at around $52.50, above both its 200-day moving average of $45.86 and its 50-day moving average of $49.32. The stock has experienced a strong uptrend in the past year — up 70 percent in the last 12 months. CBS’s stock has a high relative strength index of more than 80, implying that shares may be overbought and that the stock is due for a pullback. CBS set a new 52-week high of $53.84 on Thursday.
CBS continues to offer high-quality entertainment content. As evidenced by its first-quarter results, both its Showtime and CBS network channel audiences have grown on a year-over-year basis. One cause for concern is the increased competition from Time Warner’s HBO. Additionally, it remains to be seen if nascent content producers such as Netflix will provide formidable competition for Showtime. Still, CBS is trading at a reasonable price-to-equity ratio, has a manageable debt level, and pays a modest dividend. CBS is probably due for a slight pullback, as it recently set a new 52-week high — however, it should continue to OUTPERFORM for the rest of the year.
Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.