Wednesday, February 18, 2009

Expectations Low for CBS' Earnings (LAT)

CBS today reports quarterly results, and Wall Street is bracing for grim numbers -- and looking for the company to outline a strategy for how it will navigate the choppy waters ahead. A rapidly deteriorating economy is making it difficult for CBS to capitalize on its resurgence in prime time.

A rapidly deteriorating economy is making it difficult for CBS to capitalize on its resurgence in prime time, where viewership is up 6% over last season, a notable achievement at a time when network TV is experiencing an audience exodus. In addition to "The Mentalist," the network has notched gains for sitcoms "Two and a Half Men" and " How I Met Your Mother," the Navy forensic drama "NCIS" and the news magazine " 60 Minutes."

The nose dive in TV and radio ads is hitting the company on the balance sheet. Last fall CBS took a $14-billion write-down to reflect the diminished value of its broadcasting assets and billboards. Since then, the economy has eroded further. CBS' Internet play -- spending $1.8 billion to buy technology news operation CNet Networks Inc. -- is widely considered an ill-timed investment in the wake of a massive retrenchment in online advertising."They overpaid for it," said longtime media investor Harold Vogel. "I wouldn't be surprised if they had to take another write-down."

Then there is the issue of CBS' generous dividend. Vogel and other analysts are watching to see whether CBS reduces the payment. The company currently issues more than $725 million a year in dividends to shareholders, which it has done to attract investors. That is money that CBS desperately needs for other purposes."In this environment, cash is the most important asset that you can have," Vogel said.

Last week Standard & Poor's downgraded CBS' credit outlook to negative from stable, citing the "extremely weak recent results and lowered guidance" issued by other media companies.

In addition, S&P noted, CBS' cash position is at its "lowest point" since the company split from Viacom Inc. in December 2005. On Sept. 30, the end of the most recent reporting period, CBS had $553 million in cash.

Some analysts have further suggested that CBS could face a cash crunch and a problem meeting a $1.6-billion debt repayment due in 2010.

"Local ad trends continue to shock us with unimaginable rates of decline," Sanford C. Bernstein & Co. analyst Michael Nathanson wrote in a recent report.

Martin Pyykkonen, media analyst with Wunderlich Securities, said CBS could save more than $300 million this year by cutting its dividend 50%. "Even if they cut the dividend in half, that would still be a 10% yield, which by any measure is still high," he said. "

As the controlling shareholder, Redstone carries a pretty big stick. But you would have to question the prudence of management if they keep paying out such a large dividend.

Bernstein analyst Nathanson predicted that TV revenue for CBS could decline 10% in the fourth quarter as the weak local advertising market will more than offset the benefit of broadcast station political advertising. He also estimated that revenue to the stations could fall as much as 17%.

Radio trends are also on the slide. Nathanson predicted that CBS radio revenue would decline 22%.

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