One of the most interesting companies in America media right now is CBS (NYSE: CBS), one of the four national broadcast television networks in the United States. CBS is in an intriguing position right now because it is in a declining industry—broadcast television—but it owns some assets that could be very valuable in today’s digital media universe.

The assets are a vast library of classic television shows. CBS’s website boasts that it offers over 7,500 episodes on demand. These include some with large cult followings, including the various Star Trek series and The Twilight Zone. Along with the assets, CBS owns the rights to make new versions of many classic series.

It is capitalizing on this with plans to launch a new Star Trek series that will be primarily shown on digital video subscription. The problem is that series is not scheduled to premiere until January 2017—an indication that CBS is definitely behind the curve when it comes to streaming video.

CBS’s Streaming Video Potential

Competitors like Amazon.com (NASDAQ: AMZN) and Netflix Inc. (NASDAQ: NFLX) have already established strong brands in the sphere by aggressively marketing new programming. This gamble has certainly paid off for Netflix; an RBC Capital Markets survey on November 20, 2015, found that 51% of Americans use Netflix to stream movies and television.

Naturally, many investors are wondering if CBS could launch a credible challenge to Netflix in streaming video on the strength of the Star Trek brand. CBS also has some other potentially valuable assets for streaming video, including a working relationship with Time Warner subsidiary DC Comics—owners of a vast universe of characters, including Superman, Batman and Wonder Woman.

It recently launched a DC-based series—Super Girl—that could serve as the entry point to more series set in DC’s universe. This could help it compete with the Walt Disney Company’s Marvel Comics, which is marketing a variety of superhero-themed series through Netflix.

CBS’s Current Value

CBS is a potential value because it is relatively cheap. It had a share price of $51.69 (€48.54) on November 20, 2015, compared with market favorite Netflix, which was trading at $123.84 (€116.3) a share on the same day. More importantly, CBS appears to be seriously undervalued when compared with Netflix.

The company has very interesting numbers, including:

  • A market capitalization of $24.37 billion (€22.89 billion) on November 2015.
  • An enterprise value of $33.04 billion (€31.03 billion), indicating is underpriced.
  • Third quarter revenues of $13.66 billion (€12.83 billion).
  • A third quarter profit margin of 13.08%.
  • A net income of $1.565 billion (€1.47 billion).
  • $1.61 billion (€1.51 billion) in cash from operations.
  • Liabilities of $18.36 billion (€17.24 billion).
  • Assets of $24.24 billion (€22.76 billion).

Advertising Revenue Declining

Despite being in a declining industry—broadcast radio and television—CBS does make money. Its revenue was more than twice the size of that of Netflix, which reported a third quarter TTM revenue of $6.441 billion (€6.05 billion) on September 30, 2015.

The problem is that the revenue from its core business has declined dramatically in recent years. As recently as September 2013, CBS reported a TTM revenue of $14.41 billion (€13.53 billion) in contrast to $13.66 billion (€12.83 billion) in September 2015. This gave the company a negative free cash flow of -$298 million (-€279.85 million) on September 30, 2015.

The biggest problem here is advertising, which accounts for around 45% of CBS’s revenue. Advertising revenues fell by 4.3% in the third quarter of 2015 even though CBS is still the most watched U.S. TV network. The company also owns the cable TV channel Showtime, the CBS Sports Networks, radio stations and a publishing house.

Revenues from subscriptions, the company’s services and affiliates did rise by 9.2% in the third quarter, but that did not make up for the decline in advertising revenue, CNBC reported. Therefore you can see CBS’s big problem: It needs to compensate for declining advertising revenues. Streaming video is probably the best means of doing that, and as I pointed out above, CBS’s assets give it a potentially strong presence in digital entertainment.

CBS Is a Value Investment

This makes CBS a value investment because it is an underpriced stock that has strong potential for future growth yet a lot of revenue right now. More importantly, it is underpriced, and it does make money. To add icing to the cake, CBS did provide investors with a 1.16% dividend yield and a 23.9% return on equity.

If you’re looking for a good contrarian play in digital media and you are comfortable with a little risk, take a look at CBS. It is a profitable company in a unique position to establish a strong presence in the growing sphere of digital entertainment.

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