CBS Shares Surge on Improved Advertising Outlook


Since CBS announced last week that second-quarter profit plunged over 90 percent from a year earlier, the company's shares have surged as much as 31 percent?

What gives?

A closer look at the company's ad sales show that CBS is headed for further growth in the second half of the year, said David Joyce, media industry strategist for Miller Tabak.

Its upfront TV ad sales—contracts that are created well before the ads' air dates and locked at a set price—are down. But scatter sales, ads sold closer to when the commercials air, have risen about 30 percent. And ad prices have gone up with them.

"By holding back on the amount [of ads] that they're selling in the upfront, they'll get better pricing in the upcoming quarters," Joyce said.

The recent increase in scatter advertising, particularly in local markets, has been caused by improved economic data and signs of recovery, CBS CEO Les Moonves said in a conference call following the earnings report. Advertising in the retail and pharmaceutical sectors has shot up, as well as in the auto sector, thanks to the widely popular "cash for clunkers" program.

If brighter economic data continues to surface—most importantly on the consumer front— companies will have more confidence that people are ready to start spending again. They'll subsequently spend more on advertising, which would send CBS stock even higher, analysts said.

"It's really going to be a function of the other economic data that comes out," Joyce said. "It's really a macro call."

While these factors also hold true for other media companies, CBS' ratings give it an edge over its competition, analysts said. It remains the highest rated network and was the only one to post higher ratings this summer.

CBS stock has also outperformed its competitors because of its high reliance on advertising, Joyce said. Ad sales make up 65 percent of revenues, so its shares see a more dramatic change when ad sales increase.

But this heavy reliance on advertising—and subsequently the economy—also holds more risk. Deutsche Bank has maintained a hold rating on the stock, as a slowdown in the economic recovery could crush its price, said the bank's media analyst Doug Mitchelson.

Analysts at JPMorgan, who raised the stock's price target from $10 to $12, said its upgrade was mainly a reflection of how weak things were earlier in 2009. And despite its recent spike, the stock is still down more than 35 percent on the year. As a result of this and market volatility, Miller Tabak had raised its price target to $11 for CBS, but has since downgraded it to a neutral rating.

"The stock's performance is really just trying to get it back to levels where it was one year ago or two years ago," Joyce said. "It's a relief that things are starting to get better."

Still, Moonves remained optimistic, saying he expects the economy to continue strengthening—bringing ad revenue along for the ride.

"The second quarter was better than the first—now we are seeing a third quarter better than the second and we believe the fourth quarter will be better than the third and we will continue to improve," Moonves said.

Along with hopes for an increase in advertising revenue, CBS will release five of its network programs into syndication in the third quarter. It's also looking to sell some of its smaller assets, such as local radio stations.

"While it's obviously not smooth sailing from here, it does feel like downward estimate revisions [of CBS] are now behind us," JPMorgan said in a research note.

CBS shares settled nearly 5 percent lower on the day but remain up around 25 percent since the market's close on Aug. 6, the afternoon it released its earnings. Joyce attributed the losses to profit-taking, since the stock experienced such a quick runup.