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Standard & Poor’s Downgrades CBS to Junk on Auto Dealer Closures

Standard & Poor’s has downgraded its credit rating for CBS to its lowest investment grade due to a drop in auto advertising that is unlikely to recover even when the recession eases.

70% of CBS’s revenue comes from advertising, the most of any major U.S. media company, according to Bloomberg. Local TV and radio ad sales have been severely affected by the economic downturn, and the company’s cost-cutting efforts have not been significant enough to make up for advertising declines.

S&P analyst Heather Goodchild said ad revenue from auto dealers and other advertisers may not come back with an economic recovery. Between General Motors and Chrysler, both of which filed for bankruptcy protection recently, about 3,000 auto dealers will be shuttered.

Moody’s Investor Services gives CBS a rating just one rung above junk, and Fitch Ratings gives it one level higher than that.

Sanford C. Bernstein analyst Michael Nathanson last week boosted his fiscal-year 2010 estimates for CBS, as well as for Walt Disney and News Corp., saying that demand for new automobiles will strengthen in 2010, which in turn will strengthen local ad markets - and local TV stations in particular.

Auto ads slipped 17% in 2008, and fell an alarming 29% in the first quarter of 2009 - and Nathanson doesn’t expect the rest of 2009 to be much better. However, 2010 is likely to not be as bad, he says. He foresees that the worst case scenario for auto advertising would be a decline of 9%.

Dealer closures are expected to total 17% of the national dealer footprint - but that may not have as severe an impact as many fear, says Nathanson. The dealers that will close will be the smaller, underperforming dealers that advertise the least. Those dealers tended to spend their smaller budgets on newspaper advertising, which means newspapers will suffer most from dealer closures.