Two and a Half Reasons to Buy CBS

03/03/2011 10:58 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Strong ad sales, a solid balance sheet, and a resurgent share price spell good times for the TV network as well as the ETF that tracks the whole market, writes Benjamin Shepherd in Personal Finance.

Few investors consider television advertisements as credible sources of financial advice or economic analysis. But the money spent on marketing reveals much about the health of the US economy.

At a time when many pundits continue to bemoan the US consumer’s weakened state, advertisers have a refreshingly bullish outlook on domestic demand.

During last year’s “upfronts”—events where the press and major advertisers preview fall programming lineups—broadcast and cable networks locked in more than $16 billion worth of advertising commitments, a 20% increase from 2009. Ad rates at every major network increased 5% to 10% from year-ago levels.

Changes in rules governing spending on political ads have also provided a welcome boost. Rising demand has made it increasingly difficult—and expensive—for advertisers of all stripes to secure prime slots during hit TV shows.

Meanwhile, prices in the so-called “scatter” market, where ad time is purchased on an on-demand basis, have jumped 30% to 50% at almost every network. With the US economy picking up steam and consumers beginning to open their wallets, advertisers are jockeying to get their products in front of TV audiences.

Robust demand and seasonal strength should translate into a fourth-quarter bonanza for TV networks, several of which have yet to report year-end results.

Follow the Eyeballs
CBS (NYSE: CBS) has no problem attracting advertising dollars. The company’s program lineup topped the ratings during the first five weeks of the fall season, and attracts a diversified audience that includes young and old viewers of both sexes.

[CBS shares have continued to rise following the cancellation of the current season of top show “Two and a Half Men” and star Charlie Sheen’s well-publicized antics—Editor.]

Attractive viewer demographics and the ongoing economic recovery ensured that the network sold the bulk of its available slots during its fall upfront. With limited space for on-demand sales, media buyers report that CBS’ scatter prices jumped by roughly one-third in the fourth quarter.

Full-year earnings should also receive a boost from the divestment of radio stations and other chronically underperforming assets. Not only does this effort cut costs, but management can also redeploy resources from these operations into its higher-growth interactive businesses.

Publishing arm Simon & Schuster (5% of 2009 revenue) and the company’s outdoor-advertising division (13% of 2009 revenue) continue to benefit from the cyclical recovery and diversify the company’s revenue stream.

CBS grew ad revenue by 10% in the third quarter of 2010, and this momentum should carry over to the final three months of the year. Strong results, coupled with a recently announced $1.5 billion share repurchase, should push the stock higher.

With a solid balance sheet and excellent growth prospects, CBS rates a buy under $26. [Shares closed under $24 Wednesday—Editor.]

The Other PBS
Investors looking for a broader play on the advertising recovery should consider PowerShares Dynamic Media (NYSE: PBS).

With assets spread across 30 media-related stocks of all market capitalizations, the exchange-traded fund includes traditional names such as News Corp (Nasdaq: NWSA) and Gannett (NYSE: GCI) as well as Google (Nasdaq: GOOG) and other online properties. Advertising outfits such as Omnicom (NYSE: OMC) are also in the mix.

PowerShares Dynamic Media rates a buy under $19. [Shares closed near $15 Wednesday. Shares of Scripps Networks Interactive (NYSE: SNI) and Discovery Communications (Nasdaq: DISCA) have marked time since Shepherd recommended them in December—Editor.]

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