How To Play Viacom Stock

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About: Viacom Inc. (VIA), Includes: AMZN, CBS, NFLX
by: Olukayode Jinadu
Summary

Viacom stock price is depressed because of uncertainty surrounding the proposed merger with its corporate cousin CBS Corporation.

Viacom has some amazing media brands that can be taken to the next level with additional investments and hiring of new creative talent.

It also needs to explore a combination with new media companies such as Amazon Studios, which will help further incorporate technology into the distribution of movies and creative content.

Investment Thesis

Investors should buy Viacom (VIA) stock because of its attractive valuation, profitability, strong branding and potential merger with CBS Corporation (CBS). Viacom is attractive because of a temporary weakness in profitability in the Filmed Entertainment segment and uncertainty because of the merger with CBS.

Introduction

Viacom is an American multinational mass media conglomerate with interests in film and television. It was created in 2005 when it was spun off from the renamed company, CBS Corporation. Voting control of Viacom is held by National Amusements, a theater company controlled by tough billionaire Summer Redstone and his daughter, Shari Redstone. Viacom has two reporting segments: Media Networks and Filmed Entertainment. The company operates in 180 countries.

MANAGEMENT ANALYSIS

Viacom Target

Viacom 2018 Performance

Operating Margin (5-year average)

24.39%

21.59%

Net Margin (5-year average)

14.75%

13.28%

Return on Asset

5%

7.24%

Return on Equity

15%

25.58%

S&P 500 Stock Market Gain in 2017/2018

15.64%

Book Value Growth in 2017/2018

22.73%

Viacom’s operating margin underperformed its 5-year average in 2018 because the selling, general and administrative expenses increased, even though revenues decreased in 2018. So, because the selling, general and administrative expenses increased, management has an opportunity to rationalize this expense. Viacom’s net margin underperformed its 5-year average in 2018 for the same reason as the operating margin - i.e., the uncontrolled selling, general and administrative expenses. The company’s return on asset in 2018 outperformed the return on asset target because of strong profitability with respect to assets. This profitability that resulted in a strong return on asset also positively impacted Viacom’s return of equity in 2018, which outperformed the return on equity target due to strong profitability with respect to equity. Its book value growth in 2017/ 2018 outperformed the S&P 500 stock market gain in 2017/ 2018 because additional paid-in capital remained flat, retained earnings increased and treasure stock remained flat as well.

Segment Analysis

The Media Networks segment reaches approximately 4.4 billion cumulative television subscribers in more than 180 countries and 46 languages via 314 locally programmed and operated television channels. Its brands include our multimedia brands Nickelodeon, MTV, BET, Comedy Central, Paramount, Network, Nick Jr., VH1, TV Land, CMT and Logo. Outside the US, Viacom’s Media Networks segment has brands in the UK, Argentina, Japan, India, Italy and Portugal.

Media Networks

2018

2017

Revenue (Million)

10011

10096

Adjusted Operating Income

31.23%

32.66%

The Media Networks’ worldwide revenue decreased by 1% because of lower advertising and affiliate revenues, but it was partially offset by increases in ancillary revenues. The segment’s adjusted operating income decreased because of increased operating expenses - this is due to increased distribution and other expenses driven by costs related to growth initiatives, flat selling and general and administrative expenses.

The Filmed Entertainment segment develops, produces, finances, acquires and distributes films, television programming and other entertainment content through its Paramount Pictures, Paramount Players and Paramount Television, and it also partners with other Viacom brands: Nickelodeon Movies, MTV Films and BET Films.

Filmed Entertainment

2018

2017

Revenue

3041

3289

Adjusted Operating Income

-1.28%

-8.51%

Filmed Entertainment revenues reduced from 2017 to 2018 because of reduced theatrical revenue, including significant current year releases of the latest version of the Mission Impossible franchise and so on, compared to the previous year releases: Transformers, Jack Reacher and the action movie xXx: Return of Xander Cage. Also, Filmed Entertainment revenues decreased because home entertainment revenues dropped, primarily due to the number and assortment of titles. This decrease was much like the one seen in the theatrical revenues segment. The decrease in theatrical and home entertainment revenues was partially offset by the increase in licensing revenues from 2017 to 2018 due to the licensing of movies around the world. Viacom’s adjusted operating income for the Filmed Entertainment segment improved from 2017 to 2018 due to decreased distribution, print and advertising expenses. The segment adjusted the operating income, resulting in a loss for 2018, so selling, general and administrative expenses still need to be reduced further.

Potential Merger Scenario between Viacom, CBS Corporation and merger with Amazon Studios

Viacom has many great brands, including Nickelodeon, BET, MTV and so on, but it is facing a loss in its Filmed Entertainment segment, and quite frankly, the division lacks growth and its revenues are stagnating, so the division needs more money for investments in scripts, actors and movies. As a result, there has been a proposed merger with CBS Corporation (its corporate cousin that is also controlled by National Amusement) that must move forward to create a strong corporation with a bigger budget. Viacom’s Media segment has many great brands and is very profitable, so it will benefit from more investments from a merger with CBS Corporation. This merged corporation also needs to team up with Amazon Studios (NASDAQ:AMZN), as it has a huge budget and is looking to work with established studios like Paramount, which is currently part of Viacom. Viacom’s Filmed Entertainment segment will benefit from Amazon’s big money and from the technology it will bring to the movie-making experience, not to mention the latter’s distribution of movies, which will add to the revenues already being generated at Paramount and other Viacom/CBS properties.

In summary, the merger between Viacom and CBS Corporation must commence right away - no need for additional delay. Also, Viacom can also consider combining with Netflix (NFLX) another new technology company, creating a new ecosystem for the Filmed entertainment and media network industry. Netflix online distribution model will be great for Viacom to distribute its creative content. Also, Viacom needs a gaming division so it can further monetize movies like Mission Impossible and xXx as games for young people.

Financial Analysis

Viacom

PROFITABILITY INDICATOR RATIOS

2018

2017

2016

Gross Profit Margin

46.85%

43.93%

46.48%

Operating Profit Margin

21.59%

19.60%

21.88%

Pretax Profit Margin

15.43%

16.68%

15.94%

Profit Margin Analysis (Net Profit Margin)

13.28%

14.13%

11.52%

Effective Tax Rate

13.47%

13.25%

26.08%

Return on Assets

7.24%

8.11%

6.44%

Return on Equity

25.58%

36.35%

36.80%

Viacom’s gross profit margin remained flat from 2016 to 2018 because operating expenses increased in the Media Networks segment but were offset by the reduction in operating expenses in the Filmed Entertainment segment. The company’s operating profit margin dropped slightly from 2016 to 2018 because of high selling, general and administrative expenses in the Media Networks and Filmed Entertainment segments. Viacom’s pretax profit margin dropped slightly from 2016 to 2018 and moved in the same direction as the operating margin, and it was primarily impacted by the very high selling, general and administrative expenses. Its net profit margin increased from 2016 to 2018 due to lower provision for income taxes – the Tax Cuts and Jobs Act was enacted on December 22, 2017. The currently relevant provisions of the Act provide for a reduction of the federal corporate income tax rate. Although the net profit margin was negatively impacted by the selling, general and administrative expenses, which also impacted the pretax profit margin, the tax cuts offset this negative impact through the selling, general and administrative expenses. Viacom’s effective tax rate reduced from 2016 to 2018 because of tax cuts enacted on December 22, 2017.

Its return on assets increased from 2016 to 2018 because of a strong net margin. The company’s return on equity decreased from 2016 to 2018 as a result of the strong shareholder equity growth. Even though it was positively impacted by the net margin, this positive was counteracted by the shareholder equity growth.

Viacom

DEBT RATIOS

2018

2017

2016

Debt Ratio

68.86%

74.53%

81.00%

Debt-to-Equity Ratio

221.09%

292.68%

426.26%

Interest Coverage Ratio

3.57

3.58

3.23

Viacom’s debt ratio decreased from 2016 to 2018 because of the reduction in debt to the senior debentures due by 2044 and other long-term debts. The debt-to-equity ratio also improved from 2016 to 2018 for the same reason the debt ratio decreased - i.e., reduction in long-term debt. Although the debt ratio and the debt-to-equity ratio improved from 2016 to 2018, the interest coverage improved only slightly because the company maintained a similar level of interest payments. This interest coverage is quite low, and management should use this as an opportunity to further pay off debt.

Viacom

INVESTMENT RETURN

2018

2017

2016

Price-to-Book Value Ratio

1.56

2.36

3.79

Price-to-Earnings Ratio

6.72

7.61

11.26

Dividend Yield

2.79%

2.24%

3.92%

Viacom’s price-to-book value ratio improved from 2016 to 2018 because of two factors: declining stock price and improved shareholder equity. Just like the price-to-book value ratio, the price-to-earnings ratio improved from 2016 to 2018 because of declining stock price and strong earnings. The dividend yield dropped from 2016 to 2018 because management decided to cut the dividend, perhaps to aggressively pay off debt.

Conclusion

Viacom is a company with some very awesome brands in Hollywood that are well-liked by the American public. These beloved brands have an opportunity to grow and continue making money, so a merger with CBS Corporation makes sense, and the Filmed Entertainment segment has Paramount Studios, which has a long-storied history. Also, Viacom/CBS Corporation will benefit from a merger with Amazon Studios, which will bring a lot of cash and technology and new ways to distribute movies and television shows. This will include traditional cinema and television, and Amazon will also help Viacom/CBS Corporation conquer all distribution on all kinds of devices, including smartphones and tablets, as well as provide television on the go in cars, trains, planes and Ubiquiti IoT-driven devices.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.