Good Company, Bad Stock

 | Jan 18, 2013 | 11:00 AM EST
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CBS Corp. (CBS) was the top performer Thursday among the 500 stocks in the S&P 500, up 7.9%. I don't expect the gains to last.

The big broadcaster's shares advanced because it plans to spin off its billboard operations into a real estate investment trust. This may help realize value from a part of the company that investors don't pay much attention to, but that chipped in about $1.9 billion of the media company's $14 billion in revenue last year.

I don't expect CBS shares to do much for the remainder of this year. I can sum up my view in four words: good company, bad stock.

Don't get me wrong. I think Les Moonves, CEO since 2006, has done a nice job in reviving and polishing the company. And the stock has performed superbly for the past four years. It rose 42% last year, 44% in 2011, 37% in 2010 and 76% in 2009.

But that's just the trouble. This stock has already had a big move, to about $41 from about $8 at the end of 2008. To me, the chance of a fifth big year in a row looks remote.

A stock can advance in only two ways. Earnings can rise or investors can get excited and become willing to pay a higher multiple of earnings.

After four big years for CBS shareholders, the shares command about 20x earnings. I can't see why the earnings multiple should expand much beyond that -- especially since the five-year earnings growth rate is only about 3%.

Its top-line growth is also unspectacular. The company had revenue of $14.5 billion in 2004, and $14.6 billion in the latest 12 months. New brokerage-house recommendations aren't likely to boost the stock much. Plus, of the 24 analysts who follow the stock, 18 already recommend it.

Of course, CBS's earnings may grow. Indeed, analysts are predicting earnings growth of about 17% this year (to about $2.94 a share from an estimated $2.52 in 2012). However, I suspect those guesses are a little optimistic in a world where people increasingly get their news and entertainment from the Internet. It may be worth noting that analysts have been too optimistic about CBS earnings for six of the past seven years.

Finally, CBS's balance sheet, while not bad, isn't outstanding. Debt accounts for about 60% of stockholders' equity, compared to 36% at rival Disney (DIS).

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