Will The Return Of The Pandemic Boost ViacomCBS?
Summary
- ViacomCBS is basically selling for the same price as late 2019, despite wild swings lower and higher since my last bullish article.
- The company is making solid progress in rolling out several streaming services the past few years.
- Strong and improving earnings and free cash flow have appeared in 2021.
- The company is clearly a takeover target after Sumner Redstone's passing last year.
It’s been a wild two-year ride for ViacomCBS (VIAC) (VIACA) through the 2020 pandemic and subsequent recovery. Believe it or not, the stock has ended up at the same starting price as late 2019! (The whole U.S. stock market could finish a similarly volatile roundtrip, given a 15-20% correction in the second half of 2021 sends Wall Street back to a flat two-year showing.) The enterprise owns the CBS television network, Paramount+ streaming service, a number of cable channels, and the free for consumers, PlutoTV competition aimed at old-school cable providers.
I wrote about the company as a perfect asset combination fit with Netflix (NFLX) in October 2019 here. Since then, the pandemic sell-off smashed the price from the upper-$30s to as low as $10 in March 2020. Following this hellish ride for shareholders, the golden age of streaming to home growth generated a short squeeze into early 2021. Then, rumors of a takeover and "meme" buying by new investors pushed the quote above $100 in March 2021. That works out to a 900% gain over roughly 12 months for any lucky trader/owner hitting the trough to peak. However, a massive margin call liquidation by Bill Hwang’s Archegos Capital cratered ViacomCBS back to reality.
The end result of all the swings down, then up, then down again is ViacomCBS has landed in the upper-$30s to low-$40s range during the summer of 2021, almost exactly where the pandemic journey began. So, what’s next for the stock, if the Delta variant and others that may follow into 2022 cause Americans (and global viewers) to hang out at home this fall and winter watching television more than anticipated just a few weeks ago?
Improving Business Fundamentals
The good news is ViacomCBS owns a large and growing stable of valuable media assets. A concerted push into streaming delivery is underway. The company has a unique hybrid idea of streaming advertising-based cable tv competition for free to your home with PlutoTV. Valuations remain below what I would expect. And, the possibility of takeover bid for the company remains a logical proposition.
Below are highlights taken from the March Q1 earnings report, showing solid growth in its operations vs. the beginning of the pandemic last year. With all the government stimulus money floating around, a slide back into pandemic living patterns, increasing eyeball traffic to its media properties, could propel growth far above the return-to-normal viewership expectations (less growth) now priced into the stock.
Image Source: Q1 Earnings Report
Decent Valuation Story
Out of all the major streaming and television network owners, ViacomCBS sports one of the lowest valuations on both trailing and future estimated results. Whether its price to sales, earnings, or cash flow, Viacom appears to be a worthwhile long-term investment choice. Below I am comparing the company to peers and competitors Netflix, Discovery (DISCA) (DISCB) (DISCK), Fox (FOX) (FOXA), Walt Disney (DIS), Comcast (CMCSA), AT&T (T), AMC Networks (AMCX), Alphabet-Google (GOOG) (GOOGL), Amazon (AMZN), and Apple (AAPL).
In terms of takeover potential, enterprise value calculations (equity capitalization + debt - cash) on EBITDA or free cash flow are quite appealing. Below are comparison charts measured against the industry group.
In terms of balance sheet leverage (debt), return on assets, and final profit margins, ViacomCBS is an average to better than average selection vs. peers in the middle of 2021.
Another positive for shareholders, when we exclude the AT&T business model focused on communication infrastructure, the company pays the highest cash dividend yield of peers. Most do not pay any dividend. As a result, the 2.35% ViacomCBS cash distribution provides some income while waiting for better operating growth or a takeover of the organization. When you contrast the dividend rate vs. the S&P 500 index average of 1.3%, lacking any takeover/merger upside, ViacomCBS begins to stand out as an interesting buy choice for portfolios.
Takeover Bait
The latest rumor is the Paramount+ service will be merged or bundled with Comcast’s struggling Peacock offering to better compete with Netflix, Amazon Prime, Apple TV, Alphabet's YouTube, Disney’s Hulu and Disney+, plus the approaching combination of AT&T’s HBOMax streaming service (Warner assets) with Discovery+.
I still feel the best and most logical fit for ViacomCBS is a full merger with Netflix. Netflix’s future may depend on getting a live broadcast network for cross promotional purposes. Streaming top-rated live content, next to its current on-demand film/episode library would absolutely be a winning idea for Netflix. Paramount’s movie collection and television show library would also fix the Netflix requirement of licensing content for short periods of time from other studios.
Of the largest streaming giants, an all-stock offer for ViacomCBS (no cash required upfront) using Netflix’s rich valuation is a no-brainer. Netflix can afford a high buyout offer and make the deal quite appetizing for the Redstone family holding voting control, after years of little gain in the equity quote.
If you look at a chart of equity market capitalization sizes, while pondering the asset mix and management strategies of the biggest players, a marriage of Netflix/ViacomCBS makes the most sense. AT&T is in the process of getting out of the media space, Comcast already owns the NBC network (meaning they could not get government approval for another network), and Disney owns ABC. Netflix is today valued at 9x the shareholder capitalization of ViacomCBS by Wall Street. So, even a rich deal price for the company would be a minor acquisition cost for Netflix, while adding considerable earnings, free cash flow, and synergy/bundling potential.
Of course, Alphabet, Amazon or Apple could make a play, but the Biden Administration has already hinted major acquisitions by the three would face increased Justice Department scrutiny for approval.
Final Thoughts
Near the price peak in March 2021, management smartly issued $3 billion in new equity to help pay down debt and fund streaming expansion plans. Considering the high $85 common share issuance price, this decision proved a stroke of genius because it did not dilute existing owners to a great degree, while raising liquidity backing the whole company.
Another piece of the puzzle I like is ViacomCBS remains heavily shorted. Exactly why is a little confusing to me. Sure, the company is responsible for slightly more debt than the industry average. Sure, astounding overall growth expectations are not part of the investment landscape today. Sure, weak growth the last decade under Sumner Redstone has frustrated a number of long-term investors. Sure, the business combination of Viacom (Paramount) and CBS in late 2019 is still searching for direction and a smooth integration of managers/assets. Yet, the whole enterprise is solidly profitable and cannot help but grow if the COVID-19 pandemic remains a part of our lives another year or two.
I have both owned and shorted ViacomCBS the last several years. Nevertheless, my trades since late 2020 have been on the long (buy) side. I have a goal of reentering a long position on a significant stock market correction into the fall of 10-20%. You can review the technical and breadth problems appearing in the U.S. stock market this summer, from an article I wrote in July here. If the pandemic spread numbers keep climbing in August, and I can purchase shares under $40, a nice risk/reward opportunity may open up again. The takeover potential and high dividend yield are icing on the cake.
Given pandemic shut-ins this fall and winter, and assuming the government responds with another round of stimulus checks (which may not occur this time around), a target price of $50-55 by early 2022 is not a stretch to forecast (slightly stronger than forecasted earnings with a slightly better valuation on such results). Last but not least, a takeover proposal by Netflix, Alphabet, Amazon, Apple or another large Wall Street titan like Warren Buffett’s Berkshire Hathaway (BRK.B) (BRK.A), would likely include a substantial premium vs. the current quote. The upside in this scenario may be well north of $70 per share.
What are the risks owning ViacomCBS today? A major recession (perhaps the pandemic spirals into a real disaster into October), without any rescue money from Uncle Sam, is the biggest downside scenario to consider. If advertising rates/revenues decline, sellers and shorts in the stock would run the show for a while. Absent an overnight shock like the beginning of the pandemic in 2020, I am modeling any downside may be limited to $30. Of course, another risk is a Wall Street crash scenario of 40-50% from record overvaluations in 2021. If we get a market crash into October (don’t say it cannot happen), a $25 price is entirely possible.
When all is said and done, a range of $39-$45 may have the best odds of occurring into the end of 2021, using current forecasts and expectations by Wall Street analysts.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in VIAC over 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.
This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (46)
FAAG: the FTC/FCC will not allow it.
I even doubt Amazon and MGM merger will happen.
So buying VIAC which is so much larger than MGM -not likely.by Netflix - also will not happen
In the recent CC they stated they will NOT do acquisitions and see no companies they would like to buy.
Besides why would Redstone agree to be paid in overpriced Netflix shares? Is that a great deal for Redstone guess not. Netflix great growth story is over.by Comcast
Will also not happen, not possible because of antitrust regulations.The only one who could do it is the new WarnerbrosDiscovery but after mid 2022. Only if growth numbers for WBD struggle and guess in 2024 when debt levels for WBD have returned to acceptable and the contract Bakish has with VIAC expires.
Hastings said he did not believe the consolidation had affected Netflix’s growth trajectory and said there were no deals in the works for his company.“While we are continually evaluating opportunities, we don’t view any assets as ‘must-have’ and we haven’t yet found any large scale ones to be sufficiently compelling to act upon,” he said