CBS Corp. (CBS:US), which last week won higher programming fees from Time Warner Cable Inc., is proving the best investment among major media companies.
The most-watched TV network in the U.S., CBS produced the highest risk-adjusted return for the past three years of the 16 companies listed in the Standard & Poor’s 500 Media Index, according to the BLOOMBERG RISKLESS RETURN RANKING. The stock more than tripled (CBS:US) in the period, making up for above-average volatility, as media companies rebounded from the 2007-2009 economic crisis.
Chief Executive Officer Leslie Moonves has led broadcasters toward an economic model more like the cable industry’s, drawing subscription as well as advertising revenue. Large audiences for “NCIS,” “The Big Bang Theory,” and National Football League games have given New York-based CBS the clout, like ESPN and Fox News, to demand higher fees from pay-TV services such as Time Warner Cable while allowing the company to sell digital rights to distributors including Amazon.com Inc.
“CBS has done one of the best jobs managing the digital transition,” Alan Gould, an analyst with Evercore Partners in New York, said in an e-mail.
The company also is winning over stockholders by increasing dividends, repurchasing shares and taking steps to get out of the outdoor advertising business, said Edward Atorino, an analyst at Benchmark Co. in New York.
Bloomberg’s risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns aren’t annualized.
CBS had a total return of 262 percent, best among all stocks in the ranking, and a volatility of 33, for a risk-adjusted gain of 7.8 percent in the three years ended yesterday. NBCUniversal owner Comcast Corp. (CMCSA:US), with the third-highest absolute gain and lower-than-par price swings, ranked second with a risk-adjusted return of 6.2 percent.
Three years ago, CBS was trading at about $15 a share and investors were concerned that a shrinking prime-time audience would erode the broadcast television business as viewers defected permanently to the Web.
As ad sales have been hurt by the audience decline, broadcasters such as CBS, controlled by Chairman Sumner Redstone, have developed two new sources of revenue: retransmission fees and online services. CBS has harnessed Amazon, Netflix Inc. and other Internet video services to find new revenue outlets for its shows. The company sold exclusive online subscription rights this year to the hit show “Under the Dome” to Amazon.com in a deal that enables streaming four days after episodes air.
To maximize revenue, companies are pushing to get viewers counted whether they watch live, later on DVR or online.
“As we look toward the future, it becomes more and more important to have the ability to sell your content to Netflix, to Amazon, Hulu Plus, any other entrants in the field,” Moonves said in a Sept. 4 interview with Bloomberg Television.
Television station owners also have been able to charge pay-TV systems to retransmit their signals, even though they’re available to homes for free over government-owned airwaves. Networks like CBS and Fox, now part of Rupert Murdoch’s 21st Century Fox Inc. (FOXA:US), sought the fees for stations they owned, and grabbed a cut of the money going to their affiliates.
“People wrongly believed they were dinosaurs,” said Brian Wieser, an analyst at Pivotal Research Group who recommends buying CBS stock. “Many had argued the death of television for a very long time. And sentiment around it reflected that. This medium isn’t dying, it’s thriving.”
Retransmission fees at CBS may double to $1 billion by 2016 from an estimated $500 million this year, said Wieser.
“You have a lot of engines driving real cash flow,” Wieser said. “That’s sustainable.”
For the industry, retransmission fees are expected to at least double to more than $6 billion by 2018 from $3 billion this year, according to research firm SNL Kagan. In the most recent quarter, CBS reported an 18 percent gain in affiliate and subscription revenue, which includes the fees. The company didn’t specify how much retransmission revenue grew alone. It jumped 62 percent in the previous period.
CBS rose 0.9 percent to $54.05 yesterday in New York trading. The shares have advanced 42 percent (CBS:US) this year, topping the 27 percent return for the S&P 500 Media Index.
In CBS’s negotiations with Time Warner Cable, Moonves fought successfully to maintain the network’s right to sell most of its content to online distributors. That field could expand as Sony Corp., Intel Corp., Apple Inc. and Google Inc. are seeking to develop pay-TV systems that would deliver traditional TV programming packages over the Internet.
The monthlong stalemate with Time Warner Cable left more than 3 million viewers without access to CBS shows or sports events including U.S. Open Tennis. In the end, the cable company agreed to pay a significant increase for the right to carry CBS, though still below $2 per subscriber per month, according to people with knowledge of the situation who asked not to be identified because the terms are private.
“We certainly didn’t get everything we wanted,” Time Warner Cable CEO Glenn Britt said in a statement last week.
Next up is Walt Disney Co., owner of ESPN and the ABC network, which is discussing renewal of its deal with satellite TV-provider Dish Network Corp. that ends this month.
More negotiations that result in protracted outages could lead to government intervention at some point and threaten the broadcasters’ ability to charge fees.
During Time Warner Cable’s dispute with CBS, Britt called on Congress and the U.S Federal Communications Commission to reassess the 1992 retransmission consent rules that allow broadcasters such as CBS to charge cable companies for their signals.
While the FCC didn’t take action, the CBS dispute with Time Warner Cable may have planted the seeds for an update of the rules, according to Rich Greenfield, an analyst with BTIG LLC in New York.
“The disequilibrium that currently exists is not sustainable,” Greenfield said. “We expect change.”
Another potential threat to CBS and its peers comes from Aereo Inc., a startup backed by billionaire Barry Diller that gives users access to broadcast networks over the Internet starting at $8 per month.
Aereo, which essentially rents the use of tiny antennas located in remote facilities in areas where it is available, pays nothing to broadcasters. CBS and the others have alleged copyright infringement and continue to appeal after losing recent court battles to stop Aereo.
CBS’s stock isn’t as cheap as it once was, after five years of gains that have brought it close to its all-time high from 2000. Still, the company is benefiting from smart scheduling and aggressive negotiating for broadcast rights, said Benchmark’s Atorino.
“If the economy doesn’t crater, broadcasting should defy all the skeptics out there,” he said. “CBS is not bashful about asking for more money. They’re in pretty good shape.”
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