CBS (NYSE:CBS) has done an impressive job of making its television network the No. 1-rated network, vaulting over its peers. As a result, CBS stock vaulted to all-time highs last month in what has been an impressive recovery since 2009's stock market lows, with the stock having given investors 15-bagger performance since then.
CBS's prime-time ratings took a hit in the most recent week from the NBA Finals on Disney's ABC, but 38 weeks into the 2012-2013 Nielsen season, CBS leads its rival U.S. broadcast networks by a substantial margin, with ratings of 7.1 and a 12 share comparing favorably to ABC's 5.0 and eight, respectively, and even lower results for Comcast's NBC and News Corp.'s Fox. Let's take a closer look at how CBS has achieved this success, and what investors can expect from the stock going forward.
What's under the CBS umbrella?
CBS is best-known for its namesake U.S. broadcast network, but it has plenty of other businesses that it runs. The company also owns the CW Network as well as premium cable giant Showtime, in addition to having its own television production studios and an extensive sports presence that includes its own nascent sports network. An immense radio network diversifies CBS's media presence, and the company's Simon and Schuster publishing company adds books and other publications to the mix. Surprisingly, CBS also owns the third-largest billboard and outdoor-advertising business in the world.
Lately, CBS has taken steps to refocus on its broadcast units. Earlier this year, CBS stock soared on news that CBS would spin off its billboard and outdoor advertising business, using the tax-favored real-estate investment trust structure to benefit shareholders. It also bought a 50% stake in the TV Guide Network in March, teaming up with Lionsgate to bolster its basic-cable offerings and obtain a new vehicle for CBS's various content brands.
The costly world of television
Yet, the big challenge that CBS and its peers continue to face is the rising cost of content. Working with Time Warner's Turner Broadcasting, CBS locked in a 14-year deal with the NCAA to broadcast the lucrative men's national basketball tournament, better known as March Madness, that will cost the companies $10.8 billion. With NBC, Fox, and ESPN, as well as other networks and broadcast outlets facing many of the same challenges with high-cost content, including the NFL and other popular sports leagues, the whole industry has recognized how important it is to offer viewers what they want to watch.
CBS is doing its best not to pick favorites in the streaming world, arguing that it still has a strong relationship with Amazon rival Netflix (NASDAQ:NFLX). But with Netflix having recently lost 1,800 movies and television shows at the beginning of May as a result of expiring licensing deals, the streaming giant is sensitive to moves like CBS's that give its competitors any edge whatsoever, especially with desirable content.
Still, new media threaten CBS's areas of traditional dominance. In news, for instance, the perception among younger viewers is that big-network news is slow and obsolete, with more people getting immediate news through social media and online sources. Alternatives to regular weekly viewing have also forced CBS to react in order to protect its traditional advertising revenue, while satellite and streaming radio has posed new competition for its radio network.
Where the growth is
Despite all these challenges, CBS has thus far managed to produce strong earnings growth. With earnings expected to rise almost 20% this year, and another 12% in 2014, the company is clearly making the most of its opportunities, and taking steps to control costs and other threats to its profitability.
As long as the company can successfully defend its traditional turf and find new growth opportunities, CBS stock has further room to run higher. With CBS's content potentially being its most valuable asset, investors should continue to see the positive impact of the network's efforts on CBS stock well into the future.
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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Amazon.com, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.