SUMMARY. Risk Level *

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1 March 09, 2015 CBS Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 01/07/2015 Current Price (03/06/15) $60.59 Target Price $ Week High $ Week Low $48.91 One-Year Return (%) Beta 1.79 Average Daily Volume (sh) 6,298,666 Shares Outstanding (mil) 497 Market Capitalization ($mil) $30,130 Short Interest Ratio (days) 2.66 Institutional Ownership (%) 83 Insider Ownership (%) 2 SUMMARY Risk Level * (CBS-NYSE) Higher advertising revenues from Thursday night NFL and mid-term elections along with constantly rising retransmission revenues helped CBS Corp. to post strong results for fourth-quarter Adjusted earnings per share of $0.77 came in line the Zacks Consensus Estimate and grew 8.5% y/y; revenues also increased 3.1% to $3,681 million and easily exceeded Zacks expectation. CBS Corp. continues to focus on diversifying its revenue streams in order to lower dependency on traditional advertising revenues. These include reverse compensation from affiliates, digital distribution and retransmission consent fees. At the same time, keeping up with the changing trends, the company has launched two over-the-top channels. Moreover, it will launch an international independent streaming service for its premier channel Showtime. However, unfavorable currency fluctuations and stiff competition continue to be concerns. Below Avg., Type of Stock Large-Growth Industry Broadcast-Radio/TV Zacks Industry Rank * 184 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $0.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 1.6 Earnings Per Share (%) 36.5 Dividend (%) ,763 A 3,369 A 3,302 A 3,571 A 14,005 A ,570 A 3,188 A 3,367 A 3,681 A 13,806 A ,524 E 3,317 E 3,412 E 3,814 E 14,082 E ,888 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year using TTM EPS N/A (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.73 A $0.76 A $0.76 A $0.71 A $2.80 A using 2015 Estimate $0.78 A $0.78 A $0.74 A $0.77 A $2.96 A using 2016 Estimate $0.77 E $0.89 E $0.91 E $1.06 E $3.62 E 2016 $4.39 E Zacks Rank *: Short Term Only Q4 & FY EPS figs for 2013 and 2014 have been recasted following 1 3 months outlook 3 - Hold outdoor spin off. * 2015 Definition Zacks / Disclosure Investment on Research, last page All Rights reserved. Projected EPS Growth - 10 Next S. Riverside 5 Years Plaza, % Chicago IL

2 OVERVIEW Based in New York, CBS Corporation (CBS) owns the top media franchises. The company now reports under four broad segments following the separation of its Outdoor Unit. Entertainment Segment comprises CBS Television Network; CBS Television Studios, CBS Global distribution Group and CBS Films, the producer and distributor of theatrical motion pictures; and CBS Interactive, which operates one of the leading online content networks for information and entertainment and includes leading brands, such as CNET, CBS.com, CBSSports.com, GameSpot, TV.com, CBSNews.com, ZDNet, Last.fm, and MetroLyrics.com. Cable Networks Segment comprises the premium subscription program services, Showtime Networks; the cable network focused on college athletics and other sports CBS Sports Network; and a venture between Showtime Networks and Smithsonian Institution, Smithsonian Networks. Publishing Segment comprises Simon & Schuster, which publishes and distributes consumer books in printed, audio and digital formats (audio downloads and electronic books) both domestically and internationally under imprints such as Simon & Schuster, Pocket Books, Scribner and Atria Books. Local Broadcasting Segment comprises CBS Television Stations consisting of 30 owned and operated TV stations, and CBS Radio, consisting of 117 radio stations owned and operated in 26 U.S. markets as of Feb 13, On Jan 16, 2013, CBS Corporation announced its plan to convert its CBS Outdoor operations in North America and South America into a real estate investment trust ( REIT ) and divest its Outdoor businesses in Europe and Asia, which has been reflected as a discontinued operation in the books as of Dec 31, The company launched an IPO in the first quarter of Subsequently, CBS divested 81% of its stake in the unit in Jul 2014, thereby completing the split-off. CBS Corp. was born out of Viacom when the latter split into two publicly traded companies New Viacom and CBS Corporation on Dec 31, Each outstanding share of Viacom s common stock was converted automatically into a right to receive half a share of New Viacom common stock and one CBS common share. New Viacom retained MTV Networks (MTV, VH1, Nickelodeon, Nick at Nite, Comedy Central, CMT: Country Music Television, Spike TV, TV Land and many other networks around the world), BET, Paramount Pictures, Paramount Home Entertainment, and Famous Music. REASONS TO BUY Catalysts Driving Growth: CBS Corp. s sustained focus on increasing subscription based revenue channels is a long-term growth driver. The company has an extensive library of premium content that it will be monetizing over the next few quarters. Also, we expect the company to continue to benefit from increasing reverse compensation from affiliates and retransmission consent. Ratings continue to pace up for both CBS Television Network and CBS Radio. Moreover, CBS with its sitcoms like The Big Bang Theory remains the number 1 network in America across key demos. Further, CBS Corp. expects retransmission fees to hit the $2 billion mark in The company renewed several strategic deals, including affiliate contracts with LIN Media, Tribune Broadcasting, Media General, and Gray Television and has many more in the pipeline, in order to make sure it achieve its retransmission fees target. Also, an addition of Sunday Night along with Thursday Night NFL game for eight weeks will add to advertising revenue apart from political spending. Moreover, keeping up with customer demand the company has launched two over-the-top services namely CBS All Access Equity Research CBS Page 2

3 and CBSN in in the last year. It also announced its plan to launch an independent streaming service for its premier channel Showtime, somewhere in The company also plans to launch streaming Showtime service in Canada in association with Bell Media and has inked an agreement with Sony Corp. to stream some of its content on the latter s online TV service. Shareholder-Friendly Approach: In the quarter under review, CBS Corp. repurchased $800 million worth of stock and intends to buy back another $1 billion in the first quarter of CBS Corp. raised its share repurchase authorization to $6 billion and hiked its dividend by 25% last year, which underscores the company s priority of maximizing shareholder return. The company s shareholder friendly approach makes it an asset for yield and growth seeking investors. As of Dec 31, 2014, the company had shares worth $4.8 billion available under its repurchase program. Adding Diverse Revenue Streams: CBS Corp. is also active in adding other diverse revenue streams to hedge against economic cycles. One such move is the company s expansion into the fastest growing live gaming and esports market. The company through one of its divisions, CBS Interactive, has entered into a partnership with TwitchTV, a leading video game broadcasting network and Major League Gaming, the world's most renowned esports league. Alongside, CBS Corporation acquired the remaining 50% stake in TV Guide Digital, including the TVGuide.com and TV Guide Mobile properties. The addition of TVGuide.com to CBS impressive portfolio is believed to be a major boost for the company s digital business. REASONS TO SELL Adverse Currency Fluctuations: With wide scale global operations, the company remains prone to fluctuations in currency exchange rates. A strong U.S. dollar is likely to have an adverse impact on the top and bottom line results. In the third quarter, unfavorable forex fluctuations alone hurt earnings per share by $0.03. Advertising an inherent Risk: Advertising remains a significant source of revenue for the company, which in turn depends on the health of the economy. In 2014, advertising contributed to 52.2% of the company s total revenues. Any change in the macroeconomic backdrop has the potential to severely impact advertising an in turn the company s overall performance. Stiff Competition May Weigh on Results: The media industry is highly competitive and CBS Corp. faces intense competition from other broadcast radio and television stations; cable television networks; motion picture studios; and outdoor advertisers in the market in which it operates. This may weigh on the company s top-line results. RECENT NEWS CBS Q4 Earnings Rise Y/Y on NFL, Political Advertising Feb 12, 2015 Higher advertising revenues from Thursday night NFL and mid-term elections along with constantly rising retransmission revenues helped CBS Corp to close 2014 on a high note. The company s fourth-quarter adjusted earnings per share from continuing operations came in at $0.77, rising 8.5% year over year and in line with the Zacks Consensus Estimate. Though unfavorable forex fluctuations hurt earnings per share by $0.03, aggressive share buyback activity provided ample cushion to the bottom line. Equity Research CBS Page 3

4 Some other highlights include the launch of a streaming Showtime service in Canada in association with Bell Media. With highly acclaimed shows like NCIS, The Good Wife, CSI and The Big Bang Theory, CBS Network continues to be the most watched television network in the U.S. With tremendous demand for its content, the company continues to monetize it in several newer ways, thereby boosting revenues. Back to results, total revenue grew 3.1% to $3,681 million and was ahead of the Zacks Consensus Estimate of $3,642 million driven by 4.1% growth in advertising to $2,147 million and 10.9% rise in affiliate fees to $601 million. However, adjusted operating income before depreciation and amortization (OIBDA) decreased 3.7% to $778 million as the company faced higher costs mainly on account of new NFL contracts. Segment Detail Entertainment revenues grew 2.1% to $2,260 million owing to increases in advertising affiliate and subscription fees. However, the segment s OIBDA fell 31.3% to $287 million due to increased investment in television content. Cable Networks revenues increased 5% to $499 million due to higher licensing and affiliate fees. Subsequently, the segment s OIBDA also increased 24% to $199 million. Publishing revenues fell 4.4% to $215 million due to tougher year over year comparisons. The segment s OIBDA also fell 27% to $27 million because of lower revenues and higher advertising costs. Local Broadcasting revenues were up 9% to $785 million in the quarter on higher political advertising given mid-term elections. The segment s OIBDA grew 19% to $313 million. CBS Television Stations and CBS Radio s revenues grew 15% and 2%, respectively. Other Financial Details CBS Corp. ended the quarter with cash and cash equivalents of $428 million, long-term debt of $6,510 million, and shareholders equity of $6,970 million. For the year, the company generated net cash flow from operations of $1,275 million and incurred capital expenditures of $206 million. Free cash flow generated during the quarter was of $880 million, substantially up from $280 million generated in fourth quarter of CBS Corp. is focused on lowering its dependency on conventional advertising, which is commendable since it is highly susceptible to economic headwinds. Separation of CBS Outdoor Americas Inc. was a step in that direction. Also, the company is focusing on enhancing its non-advertising revenue streams, like reverse compensation from affiliates, content monetization, digital distribution, syndication sales and retransmission fees, to boost its revenues. CBS Corp. continues to expect retransmission fees to hit the $2 billion mark in Currently, it expects retransmission fees to reach $1 billion by Significant deals in the pipeline make the company positive about achieving its target. Share Repurchase Update CBS Corp purchased $800 million worth of stock in the quarter and intends to buy back another $1 billion in the first quarter of Equity Research CBS Page 4

5 Dividend Update On Jan 30, 2015, CBS Corp announced a quarterly dividend of $0.15 per share, payable on Apr 1, to shareholders of record on Mar 11, In Aug 2014, the company had hiked its quarterly dividend by 25%. Equity Research CBS Page 5

6 VALUATION Over the last five years, CBS Corp. s shares have traded in a wide range of 11.1X to 25.7X trailing 12- month earnings. The stock is also trading at a discount to the industry average, based on forward earnings estimates. Our target price of $64.00, 17.7X 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low CBS Corporation (CBS) N/A Industry Average S&P BRITISH SKY BRO (SKYAY) iheartmedia, Inc. (IHRT) N/A N/A N/A 7.7 N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B P/B ROE D/E Div Yield 5-Yr High 5-Yr Low Last Qtr. Last Qtr. CBS CORP (CBS) EV/EBITDA Industry Average S&P N/A 2.0 N/A Equity Research CBS Page 6

7 Earnings Surprise and Estimate Revision History Equity Research CBS Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CBS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1128 companies covered: Outperform %, Neutral %, Underperform 8.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research CBS Page 8