One of the overriding themes in 2016 investing is an expectation that consumer discretionary stocks will fare well. That’s because hourly wages, total hours worked and total employment statistics keep rising. In fact, private sector employment figures showed an increase of 257,000 jobs in December—the biggest one-month increase in 2015.
As a result of increased employment and wages, consumers have more money to spend than in recent years. That money’s going towards savings, autos, housing, travel and entertainment.
My favorite entertainment stock is CBS Corp. (CBS), a stock I’m keeping an eye on for a possible addition to one of my Smart Investing in Turbulent Times portfolios. Record earnings, double digit growth, low P/E and a modest dividend are just some of the reasons it’s landed on my watch list. Here’s my current analysis.
CBS Corp. is a diversified media and entertainment giant. CBS’s entertainment division, comprised of its CBS-branded media, generates 60% of the company’s revenue. The balance of revenue comes from cable networks, publishing and local broadcasts. These include Showtime Networks, CBS College Sports Network, Simon & Schuster and over 140 local TV and radio stations.
CBS’ revenue is expected to grow 0.5% and 5.0% in 2015 and 2016. Advertising revenues were 52% of total 2014 revenue. The company has been steadily increasing its sources of non-advertising revenue to achieve better earnings stability and lower stock price volatility.
Revenue growth is coming from increases in worldwide syndication, TV retransmission and reverse compensation, streaming, cable subscriptions and e-book sales. The company’s growth in retransmission revenue is expected to surpass the previous guidance of $2 billion by 2020. Revenue growth is leading to earnings growth, enhanced by margin expansion.
CBS, Apple and Michael Kors: A Comparison
The CBS share price peaked at an all-time high of 68.10 in March 2014. At that time, analysts began a series of downward earnings revisions for CBS. As a result, the stock’s valuation went from fairly valued to overvalued.
Don’t shoot the messenger! Investors love to gripe about Wall Street analysts, but I have the utmost respect for them. They take the facts and present them to investors. It’s OUR job, as investors, to interpret those facts and make good decisions.
A basic premise in stock investing is that falling earnings expectations will lead to falling stock prices. Despite lowered earnings expectations, CBS was still a profitable, growing company. So were Michael Kors (KORS) and Apple (AAPL) when their earnings were revised downward and their stock prices fell.
When the earnings per share (EPS) growth outlook for a stock falls from 16% to 1%, as it did for CBS in 2014, it generates negative sentiment and selling. Will the selling be somewhat of a ridiculous overreaction? Sure it will! But that’s the nature of stock investing.
So What Makes CBS Different from AAPL and KORS?
Good question.
CBS had slow EPS growth in 2014, but its longer-term outlook remained as strong as ever. AAPL and KORS, on the other hand, are experiencing a multi-year transition from aggressive EPS growth to slow EPS growth. Therefore, all the portfolio managers who bought AAPL and KORS for aggressive growth have had to reconsider whether to continue owning them. Many portfolio managers made the decision to sell, thus depressing the stock prices.
CBS’s slow 2014 is now history. Full-year 2015 results will be reported on February 11, and analysts are expecting 12.8% EPS growth, followed by another 19.8% EPS growth in 2016 (December year-end). What’s more, 2015 and 2016 results represent record EPS levels for the company!
The 2016 price/earnings ratio (P/E) is 11.5, at the low end of its normal annual range of 10 to 16 (excluding upside aberrations). The stock reached a P/E of 15 or higher in each of the last seven years; and it reached a P/E of 19 or higher in five of those years. Based on trading history, there’s lots of room for investors to earn capital gains with CBS.
The dividend yield is 1.3%. CBS does not increase its dividend on an annual basis. The last dividend hike was announced in May 2014—from $0.12 to $0.15 per share.
Institutions own 86% of CBS shares, which means that professional investors consider CBS to be a desirable investment.
Total common shares outstanding fell 25.6% in the five years ending December 2014. That’s a huge decrease! The company repurchased $7.8 billion of stock during full-year 2014 and first-half 2015. Future share repurchases are expected to total 25% of market cap through 2017, which is frankly astonishing and bullish.
The company’s 2014 long-term debt-to-capitalization ratio was 48%, which is a little higher than I’d prefer. However, CBS is clearly in good financial shape, or they wouldn’t be spending billions of dollars on share repurchases.
A Stock for Growth or Value Investors
The share price bottomed a few months ago, and has begun its turnaround, in step with the annually improving earnings outlook. The stock has recently traded between 45 and 52. I expect CBS to surpass 52 this winter, barring unforeseen bad news, then climb toward additional price resistance at 58.
CBS is a somewhat volatile, undervalued, large-cap growth stock. This stock is best-suited for growth investors, value investors, and traders who have a several-month time horizon.
Aggressive growth investors and dividend investors can find better opportunities in the Smart Investing in Turbulent Times stock portfolios.
Rating: Strong Buy.
Happy Investing,
Crista Huff
Chief Analyst, Smart Investing in Turbulent Times
