Despite strong ratings, network takes hit

These should be happy times for CBS Corp: The Eye’s flagship broadcast network is off to a surprisingly strong start this fall, and pay cabler Showtime continues to impress with its original series.

But its primetime success stories won’t likely be enough to stave off more pain for the company on Wall Street as it prepares to report its third-quarter earnings on Thursday. More than any of its showbiz-conglom peers, CBS is so broadly exposed to the turmoil in the advertising market that investors are bracing for a tough quarterly report, with little relief in sight. And there’s concern that the company’s signature dividend payout may be in peril.

With CBS’ share price hovering around $8, down from a 52-week high of $29 (though Eye shares enjoyed a 13.5% bounce in trading Tuesday along with the broader market rally), some on Wall Street are questioning the wisdom of the breakup of CBS Corp. and Viacom in 2006. Having those disparate assets under one roof might’ve better shielded CBS from getting the sword in the gut amid the current economic meltdown.

Against this backdrop, CBS and Viacom chairman Sumner Redstone is grappling with the worst crisis his media empire’s faced since the purchase and precipitous decline of Blockbuster in the mid-1990s. His holding company, National Amusements, owes banks about $800 million — half of a $1.6 billion loan — in December.

Redstone recently sold $233 million in shares of CBS and Viacom. If he’s forced to sell more in order to raise cash, “I feel that he’ll sell CBS before he sells Viacom, even though there would be more buyers for Viacom,” said one analyst.

Redstone insisted last week there’s “not a chance” he’ll divest either company; he hopes to renegotiate National Amusements’ debt terms with lenders instead.

The shaky economy has hit Viacom too (and companies across every industry), but its assets, including a film studio and cable networks, are less exposed to boom-and-bust cycles.

“It never made sense to break it up the way he did,” said Alan Gould, a media analyst with Natixis Bleichroeder.

For CBS, the overriding issue is that more than 70% of its revenue from TV, radio and outdoor is advertising-dependent at a time when consumers aren’t buying and marketers are expected to pull back on spending, at least in the near term.

“No one can tell you with a straight face whether advertising will go down 5%, 10% or 20% next year,” said Gould.

That means the worst of times for CBS, despite the best efforts of prexy-CEO Leslie Moonves, as the confluence of a mortgage crisis, a credit crunch and a string of bank failures has pundits predicting the worst economic downturn since the Great Depression.

Moonves “sold nonstrategic assets, raised the dividend six times, helped to keep the stock up for as long as he could without taking on too much debt,” said Fred Moran, an analyst with Stanford Group. “I don’t think Superman could have done much more in this kind of environment.”

However, one big issue on the minds of investors is CBS’ investment in CNET. Earlier this year CBS paid $1.8 billion for the collection of websites including TV.com, Urbanbaby, Chow and Search.com. The price represented a hefty premium to CNET’s stock price, and some think CBS overpaid.

CBS undertook the acquisition to expand its digital portfolio and become more of a player in Internet advertising. Investors had been bullish on the growth prospects for online advertising, but it is not immune to the downturn.

“One area analysts would like to hear more about is CNET and if there’s any way CNET can help CBS in this kind of ad climate. I assume not but will certainly be listening,” Moran said.

CBS has done its best to prepare Wall Street for a ugly sight when its third-quarter figures are released Thursday ayem. It warned earlier this month that it wouldn’t hit its prior target for the third quarter or the year. It estimated that 2008 operating income would decline in the mid-teens from the year before — which implies a sharp dip in the fourth, or current, quarter, of 30% or more.

Investors are particularly worried about the impact on CBS of the anemic scatter market and are wondering how many advertisers are canceling fourth- and first-quarter commitments made last summer during the upfront. If the scatter market were strong, CBS would be doing very good business because its ratings have been so strong. Instead, the Eye, like its competitors, is challenged to sell available inventory in a slumping market.

CBS also is highly vulnerable on the local front with its 29 TV and 140 radio stations, as local ad spending has plunged precipitously in the past few months as big-ticket spenders such as auto dealers and banks bear the brunt of the economic turmoil. (In an ominous sign for local ad sales, the National Automobile Dealer Assn. reported that some 700 local dealerships will shutter this year, up 60% from the rate of closures last year.)

CBS also announced in its earnings warning earlier this month that it will take a $14 billion noncash writedown on the value of its assets — reflecting the declining fortunes of TV and radio stations from the go-go era of nearly a decade ago, when CBS and Viacom merged.

Addressing a sensitive issue for Wall Street, CBS also said in its earnings warning that it intends to maintain its current dividend policy. CBS has been paying a dividend since it split from Viacom, a fact that distinguished it from its sister company and from most other media congloms.

“My assumption is the dividend doesn’t get touched (now) but gets revisited next year,” Moran said.

Michael Morris of UBS Securities thinks CBS is committed to maintaining the dividend at current levels through 2009.

Analysts will be looking for more clarity on that issue when CBS execs discuss quarterly financial results with Wall Street on Thursday. The Eye is the first major media conglom to report earnings this season, followed by Viacom on Monday and Time Warner, News Corp. and Disney later in the week.

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