A common theme for investing is buying the best-of-breed. When it comes to media and streaming, I hate to say it, but CBS ( CBS) is not the best-of-breed.
For as long as I can remember, it hasn't even been the best network on television. Some years it struggles to stay in the top three. Now, when we factor cord-cutters into the mix and Netflix ( NFLX) , Roku ( ROKU) , and Apple ( AAPL) along with an expanded Disney ( DIS) offering, I'm not sure CBS has much of a place in any portfolio.
The company did manage to earn 95 cents during the third quarter, four pennies ahead of expectations as revenue of $3.3 billion basically finished in line with expectations. CBS is doing well with its direct-to-consumer push, as revenues increased 39%. Affiliate and subscription revenues also climbed 12% year-over-year.
The problem I see is in content licensing and distribution, up only 1%, and ad revenues, down 7% year-over-year. The shortfall in ad revenues was blamed on a lack of political spending, so that should return in 2020, but we're seeing the clear shift in cord-cutting and how revenue generation is captured. Ad revenue is simply a place filler. Subscriptions and DTC are the current wave in media.
After the combination with Viacom ( VIAB) , CBS almost seems it would be better splitting traditional and non-traditional business in the near future. A 1% year-over-year growth isn't going to even attract value investors to the name. A yield of less than 2% isn't sexy enough for the income guys. And growth players? In this sector, with all the other choices, forget about it. CBS is a compliment to a competitor in the sector, not a threat, or a competitor itself.
Judging by the price action of the stock, these thoughts aren't new to CBS. The Viacom deal made splashy headlines and gave CBS access to some solid content from the movie and literature sides of the world, but management still has to act on it. They may be better off licensing out or partnering on some of the best content to let others develop original content. I see too much old-line thinking with the combination of Viacom and CBS, when it is new-line and edgy content that's making the biggest splashes in media.
Although shares have bounced off the $35 level twice in the past month, the bounce sets up as a bearish flag. A close below $37.50 on the daily chart positions CBS for a drop into the very low $30 area. Dare I say it could even see a 2-handle before next summer. I think that is more likely than seeing the stock revisit $45-plus. If CBS can recapture the 50-day simple moving average (SMA), my view would turn more neutral, but until that point, I say change the channel.
The big question is, can the broad market, and small-caps in particular, continue to produce relative strength?
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