Filed Under:
Tickers in this Article: CBS, GE, DIS, SIRI, XMSR, AAPL
Normally, I favour unpopular, value stocks. CBS Corp (CBS) has all the trappings of a value story. The network broadcaster's revenues are growing at low-to-mid single digits. Investor sentiment across the media industry remains gloomy. To top it off, the stock looks cheap, priced at just 14 times analysts' 2006 earnings estimates.

Regrettably, bottom fishers will be dismayed to discover, after closer inspection, why the stock is bound to stay down. The stock is riskier than ever, and it's hard to fathom how CBS can reliably deliver earnings growth that investors expect. At best, CBS stock could stay stuck in a holding pattern for some time.

Of course, some argue that CBS, thanks largely to its primetime hits Crime Scene Investigation and Without a Trace, can outperform its competitors in a sluggish TV advertising market.

But investors take note: with CBS now at the top of the ratings pile, there are few places for it to go, except down.

As CSI matures, a ratings drop could unseat CBS from the top spot. Besides, General Electric's (GE) NBC TV, Walt Disney's (DIS) ABC TV and News Corporation's (NWS) Fox Network are each working to knock CBS off the podium. A lot of hope hinges on Katie Couric, CBS Evening News' new anchor, to maintain ratings momentum.

CBS' radio division, meanwhile, has a tough time a head of it. How will CBS Radio make up for plunging listener numbers following the defection of superstar "shock jock" Howard Stern to Sirius Satellite Radio (SIRI)?

Meanwhile, cable TV, newspapers and the Internet chip away at radio audiences. Radio listeners are tuning into XM Satellite Radio (XMSR) or becoming their own DJs with MP3 players such as the Apple (AAPL) iPod.

Investors can't afford to ignore the possibility of a general downturn in advertising spending. Of course, all media stocks are vulnerable to a slowdown. But for CBS, which relies on advertising for 70% of its revenues, the risk of an ad slump is particularly acute.

That said, opportunities do exist for CBS to lift its share value. Generating about $1 billion per year in free cash flow, CBS has some freedom to boost its 2.6% dividend or buy back shares. Successfully spreading its TV content onto new digital and mobile platforms might lift market sentiment. The Walt Disney Company's decision this week to offer online streams of popular ABC television shows will likely prompt CBS to step up its internet programming.

Otherwise, over the longer term, it's hard to make out upside for the stock. When weighing the risks and rewards on CBS, the risks still have it.

comments powered by Disqus

Trading Center