In my opinion, the steep decline in Viacom's (NASDAQ:VIAB) (NYSE:VIA) stock in the last year is an example of the recent trend of value stocks which have fallen out of favor. After all, VIAB's P/E ratio is very low at 6.21, it is generating strong free cash flow; price to free cash flow is very low at 10.75, and it is paying a generous dividend currently yielding 3.7%.
Since the beginning of 2015, VIAB's stock is down 42.6% while the S&P 500 Index has decreased 7.4%, and the NASDAQ Composite Index has lost 3.1%. Nevertheless, considering Viacom's compelling valuation and solid growth prospects, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price. According to TipRanks, the average target price of the top analysts is at $53.75, up 24.4% from its January 22 close price, which appears reasonable, in my opinion.
VIAB Daily Chart
Chart: TradeStation Group, Inc.
There are some reasons for the fact that VIAB's stock has significantly underperformed the market in the last few months. It seems that investors worry about the health of Viacom's controlling shareholder Sumner Redstone after that recent press reports hinted that his health is not so good. In my opinion, this should not affect the long-term prospects of the company, even if the Redstone family would consider selling its 79% controlling interest in Viacom. Also, investors are concerned that ratings for almost all basic cable networks have declined due to increased viewership over the Internet (over-the-top content - OTT networks) as well as the introduction of cheaper bundles by distributors. Although the changes in the way consumers consume media content affect the cable networks performance adversely, market reaction has been exaggerated in my view. After all, Viacom has many successful cable brands, reaching over 700 million worldwide households.
According to the company, its top strategic priority is investing in content especially original content for all technologies, building international scale capabilities and profitability and expanding the use of data and technology in advertising, distribution and the viewer experience to derive additional value from its brands. In my view, the fact that Viacom is effectively adapting to a digital, on-demand, socially-driven global marketplace will contribute to growth. According to Viacom, in digital, the Nick Jr. app and Noggin are all expanding their reach. Nick has surpassed 20 million installs across iOS, Android, Xbox and Roku, and the Nick Jr. app has surpassed 2 million installs with kids spending over 100 minutes per week within the app.
I believe that another growth driver could be Paramount; the studio delivered one of the top five movies of the summer in Mission: Impossible - Rogue Nation. According to the company, Paramount's ability to produce and market films is stronger than ever, but it simply did not have enough films in the pipeline in 2015 to take full advantage of its capabilities. However, the company has committed to returning Paramount to a full 15-film slate in fiscal 2016. Also, Paramount Animation has a number of exciting projects on tap including the Little Prince which its video it will release next March.
Last Quarter Results
On November 12, 2015, Viacom reported its fourth-quarter fiscal-2015 and full-year financial results which beat EPS expectations by $0.02. The company posted revenue of $3.79 billion in the period, which missed Street forecasts for revenue of $3.93 billion. The company showed earnings per share surprise in six of its last eight quarters, as shown in the table below:
Fourth Quarter Highlights
- Full-Year Adjusted Diluted EPS Increased to All-Time High of $5.44
- Media Networks Revenues Rose to Full Year Record of $10.49 Billion
- Fourth Quarter Revenues Totaled $3.79 Billion
- Media Networks Revenues Rose 5% in the Quarter, with Affiliate Fees Up 10%
- $2.1 Billion Returned to Shareholders in Fiscal 2015 Through Share Repurchases and Dividends
In the report, Philippe Dauman, President and Chief Executive Officer of Viacom, said:
Viacom's fourth-quarter and year-end results are indicative of our progress in key areas, including recent ratings improvement and renewals of important distribution agreements. Our strategy of increasing and accelerating investment in original content and expanding our profitable international footprint are among the major factors driving this success, which we believe will continue in 2016 and beyond. We are making great progress in tackling industry-wide inefficiencies in audience measurement, while expanding our audience reach with landmark distribution agreements.
First-Quarter Fiscal 2016
Viacom is scheduled to report its first-quarter fiscal-2016 financial results on Tuesday, February 09, before market open. According to 32 analysts' average estimate, Viacom is expected to post a profit of $1.19 a share, a 7.8% decline from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $1.41 a share while the lowest is for a profit of $1.12 a share. Revenue for the third quarter is expected to decrease 2.4% year over year to $3.26 billion, according to 29 analysts' average estimate. There were two EPS up revisions during the last 30 days and one down revision. Since Viacom has shown earnings per share surprise in six of its last eight quarters, there is a chance that the company will beat estimates also in the current quarter.
Considering its compelling valuation metrics and solid earnings growth prospects, VIAB's stock, in my opinion, is undervalued. The trailing P/E is extremely low at 6.21, and its forward P/E is also very low at 6.93. The price-to-free-cash-flow ratio is very low at 10.75, and the Enterprise Value/EBITDA ratio is also low at 7.0. Furthermore, the PEG ratio is extremely low at 0.67. The PEG - price/earnings to growth - ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
In addition, VIAB's margins and return on capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below:
Viacom has been paying uninterrupted dividends since June 2010, the forward annual dividend yield is at 3.70%, and the payout ratio is only 30.4%. The annual rate of dividend growth over the past three years was at 11.6%.
VIAB Dividend data by YCharts
For the fiscal year ended September 30, 2015, Viacom repurchased 21.1 million shares under its stock repurchase program. As of November 11, 2015, Viacom had $4.9 billion remaining in its $20 billion stock repurchase program.
According to Portfolio123's "All-Stars: Greenblatt" ranking system, VIAB's stock is ranked third among all 83 S&P 500 Consumer Discretionary stocks.
The "All-Stars: Greenblatt" ranking system is taking into account just two factors; return on capital and earnings yield (E/P) in equal proportions. Back-testing has proved that this ranking system is one of the best free available ranking method. I recommend investors to read Joel Greenblatt's book "The Little Book That Beats the Market", where he thoroughly explains his system.
In my view, the recent drop in VIAB's stock price creates an excellent opportunity to buy the stock at an attractive price. The fact that Viacom is effectively adapting to a digital, on-demand, socially-driven global marketplace will contribute to growth. I believe that another growth driver could be Paramount; the studio delivered one of the top five movies of the summer, and the company has committed to returning Paramount to a full 15-film slate in fiscal 2016. Considering its compelling valuation metrics and solid earnings growth prospects, VIAB's stock is undervalued; the trailing P/E is extremely low at 6.21, and the PEG ratio is also extremely low at 0.67. Moreover, the company generates strong free cash flow; the price-to-free-cash-flow ratio is very low at 10.75, and returns substantial capital to its shareholders by stock buyback and increasing dividend payments. The average target price of the top analysts is at $53.75, up 24.4% from its January 22 close price, which appears reasonable, in my opinion.
Disclosure: I am/we are long VIAB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.