JPMorgan calls CBS a 2017 top pick on streaming service growth

Published Wed, Dec 7 201610:14 AM EST

Alexia Quadrani of JPMorgan reiterated an overweight rating on CBS , calling the stock a top pick for 2017 due to the potential for superior earnings growth compared with the rest of the media industry. "CBS is on pace to grow underlying network advertising in 2016 at mid single digits, has achieved over 1 million subs at CBS All-Access and Showtime OTT (over-the-top), is generating record political dollars at its TV stations even while other broadcasters miss targets, and continues to drive higher retrans/reverse comp revenue (yesterday management broached the idea of 'perhaps surpassing' the $2.5b target in 2020)," Quadrani wrote in a research note Wednesday. Based on analysis by JPMorgan, CBS possesses one of the "strongest EPS growth rates" in the media space, while additional visibility on earnings in the past quarters shows the potential for continued expansion. "Even parts of the company that don't receive significant investor scrutiny are performing strongly: we note recent comments from CBS Interactive CEO Jim Lanzone that the last four years at CNET had been the best in its history, as measured by audience, revenue and profit," Quadrani said. The strong performance propelled shares of CBS to a 52-week high this month, with the stock rallying 29 percent for 2016 compared with an 8 percent return for the S & P 500 . CBS, 1 year Source: FactSet "We remain attracted to CBS's streamlined set of assets and are impressed by management's execution across its operating segments; it's easy to forget the big question at the start of 2016 was whether CBS could earn $4.00 in EPS, a target it now appears very likely to exceed," Quadrani noted. Even though the Super Bowl in 2017 won't be broadcast on CBS and political ad dollars from the U.S. presidential election will disappear, JPMorgan forecasts the pace of earnings growth will be sustained by other business ventures. "We are increasingly confident the company will grow operating income helped by a strong slate of content sales, continued growth in retrans/reverse comp, and greater contribution from CBS All-Access and Showtime OTT. We note our forecasts assume only slight underlying network advertising growth next year, which we view as conservative," said Quadrani. In the near term, a potential merger with Viacom could also support the stock, the analyst said, explaining that investors shouldn't rule out the likelihood of CBS acquiring other premium or regular cable assets as it aims to expand its content offerings. As of late last month, Viacom was waiting on an offer from CBS . Despite the strong rally in the stock this year, JPMorgan says valuations remain attractive, with CBS shares trading at 14 times 2017 earnings, compared with 13.5 times for the long-term average and a multiple of 16.5 times for the overall market. Quadrani's picks have a 9 percent one-year average return with a 71 percent success rate, according to analyst ranking service TipRanks, placing her in the top 12 percent of all Wall Street analysts covering any industry. In the next 12 months, Quadrani predicts shares of CBS could trade as high as $69, implying a gain of 13 percent from Tuesday's close.

Les Moonves, president and chief executive officer of CBS

Adam Jeffery | CNBC

"CBS is on pace to grow underlying network advertising in 2016 at mid single digits, has achieved over 1 million subs at CBS All-Access and Showtime OTT (over-the-top), is generating record political dollars at its TV stations even while other broadcasters miss targets, and continues to drive higher retrans/reverse comp revenue (yesterday management broached the idea of 'perhaps surpassing' the $2.5b target in 2020)," Quadrani wrote in a research note Wednesday.

Based on analysis by JPMorgan, CBS possesses one of the "strongest EPS growth rates" in the media space, while additional visibility on earnings in the past quarters shows the potential for continued expansion.