Name That Trade – $CBS: About to get the Colbert Bump?

by CC September 10, 2015 1:51 pm • Commentary

Shares of CBS were upgraded this morning at Deutsche Bank from a Hold to a Buy rating, but they lowered their 12 month price target from $67 to $60, per Bloomberg:

CBS to reach inflection point in EPS growth, has limited risk given “abating” cost pressures, “achievable” ad. rev. expectations with catalysts benefiting co. next year, Deutsche Bank analyst Bryan Kraft writes in note.

Showtime’s OTT service should become earnings driver in 2016; has structural advantages vs peers in ad. model; minimal FX exposure

CBS is “significantly under-monetizing” pay TV ecosystem, best positioned to grow from shift toward smaller bundles, new entrants (e.g. Apple); scatter pricing is strong in 3Q

I think the last bit is what’s most important, especially when you consider the massive secular shift that is taking place in video content delivery and consumption.

The stock is at a fairly interesting spot, down about 32% from its 52 week high made in May, and up about 7% from last month’s low, and 10% from a very important technical support level at $40:

CBS 5yr chart from Bloomberg
CBS 5yr chart from Bloomberg

The stock screens as cheap, trading a bit less than 11x expected 2016 earnings growth of 22% vs DIS trading 18x expected 2016 earnings growth of only 11%.

Options prices have come in hard from the recent spike, with 30 day at the money implied vol down about 30% since late August.  Further stabilization in the stock would mean vol would come back to the mid 20s in the coming months:

from Bloomberg
from Bloomberg

But given where the stock has been, and where it has support, upside call spreads look dollar cheap if you think the stock could retake $50 in the coming months.  For instance with the stock at $43.68 the Jan16 50/57.50 call spread is offered at about 75 cents.  Generally these are suckers trades in markets with elevated levels of implied vol, looking too far out of the money, but if the last month has taught us anything, especially in media stocks, that defining your risk is the way to go.

While the stock, and the set up looks interesting, we are not convinced that long premium trades, at these vol levels are the way to go just yet. The stock is on our radar and we’d either look to enter at slightly lower vol levels or after a better opportunity with the stock itself lower.