Viacom Still Not An Obvious Buy

| About: Viacom Inc. (VIAB)

Summary

Viacom was hammered after earnings despite the announcement of Sumner Redstone's replacement (which was supposed to be a catalyst).

While the company is making some interesting moves to stay with the times, I still don't see anything to suggest that most of its assets aren't melting ice cubes.

Viacom probably deserves a higher valuation, but the upside doesn't seem high enough in context of the risks for the stock to be a compelling buy.

"Well, if you haven't been listening, you don't know what the noise is. I think it is obvious to everybody what the noise is." - Philippe Dauman

Viacom (VIAB, VIA) has been a popular value thesis over the past year, as the stock has sold off dramatically and now trades at a single-digit multiple of earnings and free cash flow. So far it hasn't worked out, and today was another blow for shareholders. Sumner Redstone finally stepped down as Executive Chairman of Viacom and rather than it being a catalyst, apparently nobody cared. Dauman was openly combative on the call, but I still find myself in the shoes of the analyst who asked for clarification on the "noise" - I see real problems at Viacom, which make it hard for me to like the stock.

In a transaction, the company would likely be worth a substantial premium to what it trades at today - and it has upside even as a standalone public company. That said, this situation is not without risk, and I'm not sure the magnitude of the upside here is big enough to justify taking that risk on.

Plenty of Cash Flow Today, But What About Tomorrow?

My fundamental problem with Viacom has been that I question the longevity of many of its assets. MTV stopped being a culturally-relevant thing a very long time ago, and most of Viacom's properties (BET, CMT, VH1, etc) are second or third tier at best. Even what I view as the marquee properties (Comedy Central and Nickelodeon) face some challenges. Trevor Noah doesn't have nearly the same cachet as Stephen Colbert, and the Season 18 of South Park made it feel like Matt and Trey no longer had their heart in it (although Season 19 returned to pretty good form).

Unfortunately for Viacom, the rapid rise of new forms of content aired via alternative distribution channels (Twitch, YouTube, etc) necessarily reduces the value of "filler" content on cable networks - viewers only have so many hours in a day, and channel-surfing now competes with YouTube and Netflix (NASDAQ:NFLX) for a fixed pie of screentime. To the extent that any unbundling occurs, it seems reasonable to expect that there will be more winner-take-all dynamics - things like ESPN become more valuable, while the sorts of assets that Viacom owns become less so. I believe Comcast's (NASDAQ:CMCSA) recent move to put some Viacom channels on higher-end packages is a good example of what the future may hold.

In Viacom's defense, they aren't ignorant - efforts like their announced partnership with Snapchat, as well as things like the upcoming Dude Perfect Show on CMT, demonstrate that they're at least trying to evolve with the times. I'm just not sure they'll be successful.

That said, even the company's growth initiatives aren't growing that much. The company spends a lot of time talking about markets like India, yet even on a constant-currency basis, international revenues increased merely 3% y/y in the quarter.

Thinking About The Value

I do think there is upside here; the stock garnered a substantially higher valuation merely 12 months ago, and it doesn't seem like the media landscape has undergone a tectonic shift in the past six months that would justify a sell-off of this depth.

On the other hand, while some analysts believe Viacom could be worth $80 - $90+ (particularly if it were parceled off and sold), I don't think this is sufficient justification on which to make an investment. As it stands today, Viacom's results over the past few years have been juiced by share buybacks. But with leverage at 3x, they don't have incremental room to continue at their previously torrid pace.

Given the poor quality of many of their properties and the ensuing questions about the long-term cash flow of those assets, not to mention the leverage, it's hard for me to put more than a ~10x multiple on EPS. That does get you to the $50s, which is decent upside from where we are today, and you can generate higher price targets if you're more aggressive on your multiple assumptions or revenue/earnings forecasts.

On the other hand, I'm not sure that's enough upside for this sort of situation - or if there's really a margin of safety here. Bear in mind that the company hasn't really gone anywhere for the past five years, and the competitive threats have only grown over that timeframe - the next five years may well see significant declines rather than just flat results, in which case share buybacks would be needed just to keep EPS flat (and would likely be reduced by some debt paydown to keep leverage at an appropriate level).

In fact, I don't think it's completely out of the picture for earnings to be pressured over the next few years as they were in the quarter, such that we reach a double-digit multiple without the stock price rising very much.

Conclusion

Viacom is probably worth more than it's trading for. Aside from a few marquee assets, though, many of its properties are melting ice cubes. If you already own Viacom, it's probably worth holding out for a higher price at which to sell - but if you don't, I'm not sure it's worth building a position here unless you are convinced that Viacom will be a winner (rather than a loser) in the rapidly evolving content distribution landscape.

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