It's no secret that many retail investors have been fleeing equities for bonds in recent times. In light of bad jobs reports and a constant stream of dramatic headlines from Europe, investors want a "safe haven" -- something they can count on.
Unfortunately, this mass exodus has thrown the proverbial baby out with the bathwater. The broad disinterest in equities has resulted in a sell-off of some very solid companies. For investors still in the game, this means that companies with a solid track record and strong prospects can often be picked up on the cheap. As a "value" investor, I like analyzing beaten-down companies to see if they provide potential investors with a good value.
One stock that might classify as a good value at current prices is Viacom (VIAB). Viacom is an entertainment content company operating in the United States and internationally, owning major brands such as Paramount Pictures and MTV. While Viacom stock is highly volatile (see the chart below), I believe it could be a good pickup for investors at current prices.
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1. Cheap Valuation
I like using several different metrics to analyze the value of a stock. Why? Well, using just one metric can often skew results. But a company that consistently scores well across various valuation metrics is far more likely to be a good value than those that only do well in one category.
First up is the P/E ratio. The P/E ratio measures a company's stock price to annual earnings. While P/E ratios can vary greatly across industries, in general, a high P/E generally suggests the stock is more expensive or "overvalued" compared to earnings, while a low P/E can be an indicator that the stock is undervalued. Viacom's TTM (trailing 12 months) P/E ratio is 11.23, which compares favorably with the media industry average of 13.01 and the overall market average of ~15.5.
In addition to analyzing P/E, value-conscious investors should always take a look at the PEG ratio. This ratio analyzes future P/E in context of the projected growth rate. A PEG ratio of less than one can be an indicator that the stock's market price does not take future growth into account, and thus may be considered undervalued.
Viacom's five-year PEG clocks in at 0.72, suggesting the market is not adequately pricing in its future growth prospects -- another sign of an "undervalued" stock.
Viacom has been experiencing strong growth. Quarterly EPS growth year on year is an explosive 71.43%, compared to a media industry average of 23.98%. On a TTM basis, EPS growth is 29.65% vs. an industry average of 19.94%. Over the past five years, Viacom's EPS growth has been 17.09% compared to an industry average of 9.71%. Forward projections are similarly favorable: Viacom is projected to grow EPS at 15.70% over the next three to five years, while the media industry as a whole is projected to grow 12.73%. Viacom's cash flow has grown at 9.11% for the past five years, compared to an industry average of 7.56%. Clearly, Viacom has a strong growth record and good prospects.
Viacom's operations statistics suggest that it's well-run. Gross margin on a TTM basis is 47.29% vs. an industry average of 41.19%, and operating margin is 27.98% vs. an industry average of only 20.10%. Viacom also generates a staggering $1.4 million in revenue per employee, compared to a media industry average of $550,000. Clearly, it's a very efficient company.
Viacom offers a $0.275 dividend per quarter, marking the second time in as many years Viacom has increased its dividend. The current dividend yield of 2.38% reflects a payout ratio of 23.98% of earnings. If Viacom meets or exceeds projected growth, the dividend should grow as well, providing a solid yield-on-cost down the road.
5. Consensus Analyst Opinion Is Positive
Whenever researching a stock, I always like to see what analysts have to say about it. While analysts can be wrong and I occasionally disagree with them, if most analysts have a favorable view of a stock, it's more likely to be a good investment.
My favorite tool for analyzing analyst consensus is the Starmine Equity Summary Score, because it's an accuracy-weighted score derived from the ratings of independent research providers. It uses the past relative accuracy of the providers in determining the emphasis placed on any individual opinion. So if a specific firm is consistently wrong in its predictions, those opinions will be given less weight than those of a firm with a better track record.
Viacom's Equity Summary Score is a "very bullish" 9.4/10. Standard & Poor's rates Viacom "outperform," while EVA Dimensions, Ned Davis Research, and Ativo Research rate Viacom a "buy." EVA Dimensions, in particular, is outspoken about Viacom's attractive valuation:
VIAB's PRVit (Performance-Risk-Valuation investment technology) score is at the 95th percentile of all firms in its industry, which leads to a recommendation to 'buy.' VIAB is more attractively priced in relation to its true value than all but a few of the stocks in its industry.
Viacom fulfills many of the characteristics I look for in a value stock: low valuation, efficient management, and growth potential. If you're interested in building a value-focused portfolio, Viacom might be worth a further look.