Fool on the Street: CBS Could Be Stronger

Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment bank conferences with major companies, and we're giving you the rundown. We call this feature "Fool on the Street."

Back at the end of 2005, entertainment conglomerate Viacom (NYSE: VIAb  ) decided to separate its slower-growing television, radio, billboard, and publishing businesses from its high-margin content franchises. The stodgier firm was renamed CBS Corporation (NYSE: CBS  ) and was forced to fend for itself in a changing marketplace.

Since that time, CBS has worked to define itself as an independent entity and move into "higher-growth higher-margin businesses." A recent presentation at the Merrill Lynch U.S. Media Conference allowedCFO Fred Reynolds to detail how CBS intends to inject growth into the business and find other ways to benefit shareholders until revenue trends improve.

The business overview
Reynolds was delighted to take the audience "through the CBS story" and started with an overview of the largest operating unit. Television revenue of $9.5 billion accounts for roughly two-thirds of total sales and consists of the CBS network and 27 TV stations. The King World and Paramount production groups own the syndication and distribution rights to Wheel of Fortune, Dr. Phil, Oprah, and other well-known programs. Finally, the unit contains the Showtime cable network and the newly-acquired College Sports TV online and cable channel.

The Radio segment owns 140 radio stations in 29 markets, reaching half of all domestic households. This is down from 179 in 2006, as CBS sold smaller market stations to focus on larger markets with a higher penetration of viewers and advertising appeal.

According to Reynolds, the Outdoor segment is the market leader in North America, with half a million billboard and other displays. Finally, the Simon & Schuster publishing unit controls 17,000 titles and represents the least profitable business.

Where's the growth?
Last year, total company revenue advanced a measly 1.5% in 2006. Remove the shuttering of the UPN TV network and growth was a still-putrid 3%. Operating income growth was slightly better, but earnings grew almost 19%; meanwhile free cash flow advanced a respectable 7.6%, thanks to asset sales and cost controls.

Those aren't bad bottom-line numbers, but for investors to become more interested in ponying up for CBS shares, it will need to boost sales growth. So far, management has focused on jettisoning less appealing businesses, such as small-market radio and TV stations, UPN, and the Paramount theme parks.

A digital turnaround
For future growth, CBS is looking to "repurpose [its] content" across the wide array of developing and "different digital platforms." This includes embracing the Internet to distribute TV shows such as the extremely valuable CSI crime drama franchise -- a move that has been embraced by other television stations as well.

Radio is also moving towards high definition, offering clearer airwave signals to better compete with XM Satellite Radio (Nasdaq: XMSR  ) and Sirius Satellite (Nasdaq: SIRI  ) . The stations are also moving online, with CBS streaming 130 stations over the Internet, bringing high-margin, incremental advertising revenue.

Reynolds also sees potential in the books from its publishing branch that are migrating online; the company plans to digitize several thousand of its 17,000 titles this year. If it can somehow push these digital books -- whether through e-books, print-on-demand, or audio selections -- the margin payout would be significant; digital book revenue is "almost all profit."

Turning to billboards, I recently highlighted the huge potential of billboards that move to digital platforms. Reynolds provided early indications that the first round of company digital billboards are seeing a three-fold revenue increase and that the costs of deploying the new technology "are going down."   

The Foolish bottom line
To date, company initiatives to acquire newer media businesses have been somewhat minimal, with recent purchases of College Sports TV and Last.fm. In its defense, the focus has clearly been on removing less appealing businesses from the corporate fold, a task management seems to have executed in impressive fashion.

Currently, CBS generates nearly as much free cash flow as it reports in annual net income, and Reynolds ended the presentation by hinting at future dividend increases in the works, which signals "our confidence and our ability to generate a lot of free cash flow."

He also cited a goal of returning capital to shareholders, but overall he failed to convince me that CBS has turned the corner to higher and more consistent revenue growth. So while investors can count on reliable cash flow, they may have to look to Viacom, Walt Disney (NYSE: DIS  ) , or even internet companies like Google (Nasdaq: GOOG  ) , which appear better positioned for a digital content shift.

For related Foolishness:

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. Disney and Yahoo! are Motley Fool Stock Advisor newsletter picks. The Fool has an ironclad disclosure policy.


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