ViacomCBS: Still Too Expensive, Avoid

Mar. 11, 2020 1:13 PM ETParamount Global (PARA)144 Comments


  • Will ViacomCBS successfully pivot its operations into the decade ahead? I find it unrealistic.
  • ViacomCBS's 2021 free cash flow is guided to reach $2.4 billion, will investors wait around for that target?
  • An investment with too many questions and too few answers.
  • Ultimately, this stock is still not cheap enough, despite the aggressive sell-off these past four weeks.
  • Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Get started today »

Investment Thesis

ViacomCBS (VIAC) might on the surface look like its cheap, but given investors' concern about the stock market in general combined with an uncertain outlook for ViacomCBS, investors will require a larger discount to consider this stock compelling enough.

Ultimately, despite the aggressive sell-off these past 4 weeks, I argue that investors would do well to sidestep this investment before it gets really cheap. Here's why:

In a Tough Spot at a Bad Time

"You never know who's swimming naked until the tide goes out."

-- Warren Buffett

Investors were already unimpressed with ViacomCBS's Q4 2019 results. But now with questions over the potential for economic contraction in the air, any company that investors had doubts about before are now taking the opportunity to exit and reposition into higher-quality assets.

I specialize in deep value stocks, so I believe I've got some worthwhile experience to discern between cheap with potential and cheap on the way to get cheaper. ViacomCBS is the latter.

Accordingly, the past four weeks has seen the company lose close to 40% of its market cap.

ViacomCBS finds itself in a tough spot. It carries too much leverage, and question marks over its ability to transition its business model from linear to digital persist.

ViacomCBS carries $18 billion of net debt. For now, its OIBDA to net leverage approximates 3.4x. However, it has ambitions to grow its OIBDA from the $6 billion guided in 2020, so that including the $750 million of potential synergies, it could exit 2020 with net leverage to OIBDA of just 3x. Further down the road, over the next three years, if all goes well, its net leverage to OIBDA may well reach a more manageable 2.75x.

Historically, given ViacomCBS's ability to have a very steady and predictable revenue stream from subscribers, this level of leverage was very much manageable. However, today that is no longer the case.


The Carrot for Investors

ViacomCBS notes that 2020 will be a transition year where it has to embrace several one-time costs. However, by the end of 2020, it will have extracted around $225 million worth of synergies, out of a full potential $750 million over the next three years.

This is expected to position ViacomCBS for the potential to make $2.4 billion by the end of 2021 - a full two years out.

The most important aspect of the whole thesis for investors is to question just how much conviction they have on ViacomCBS's ability to take their large audience from a linear platform to a digital platform?

At the end of 2019, ViacomCBS's domestic streaming and digital video business had revenues of $1.6 billion or just shy of 6% of total revenues.

Having said that, ViacomCBS notes that for 2020 this business unit is likely to grow its revenues at approximately 38%, meaning that it could reach close to $2.2 billion in revenues. Will investors be willing to hold onto ViacomCBS for what is likely to be less than 10% of its total revenue next year?

On the other hand, and significantly more troubling, its consolidated total revenues were down 3% in Q4 2019. Put another way, if its streaming platform is showing any potential to be bullish about, it will take a long time for that business' revenue growth to offset the decline in ViacomCBS's core operations.

Further complicating the bullish thesis, the transition towards streaming is very expensive and will weigh on its bottom line. Thus, ViacomCBS's pre-merger high-margin business will not resemble its future operations.

Valuation - Uncertain Margin of Safety

If the argument could be unquestionably made that ViacomCBS has staying power over the next decade, that it has the ability to pivot its business model and go where the consumer finds itself, then there could be significant upside to paying just $12 billion market cap for a company that is likely to generate $2.4 billion by 2021 - just 5x to FCF multiple.

The problem, on the other hand, is the uncertainty.

Consumers will not lack streaming platforms in 2020: Netflix (NFLX), Amazon Video (AMZN), Apple TV (AAPL), Disney (DIS), to mention a few.

So not only is this space highly crowded and incredibly competitive, all these players have huge sums of capital ready to deploy. How will ViacomCBS successfully compete in this space?

The Bottom Line

ViacomCBS Brands

Image: ViacomCBS Brands

It was cheap before, but it got a lot cheaper after.

ViacomCBS's core operations are struggling to endure cord-cutting. Its ability to reposition itself in the digital world brings up more questions than answers. It carries too much debt. On balance, it's very challenging to find a strong bullish thesis even while it trades for just 5x its 2021 free cash flow.

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