A Quick Peek At Viacom (VIAC)

Summary

• I take a very quick look at VIAC to see how it's valued.
• I do some light research, run some earnings multiples and DCF, and take a look at the balance sheet.
• VIAC appears to be reasonably valued here, and could be worth a look.

Here I wish to take a very quick peek at Viacom (VIAC) who’s stock price has recently fallen >50% from around $100 to today’s price of $46.61. How does VIAC look today and what could it’s fair value be?

ViacomCBS Inc. is an American media conglomerate. The company's main assets include:

• Paramount Pictures
• CBS
• Domestic networks (including MTV, Nickelodeon, BET, Comedy Central, and Showtime),
• International networks
• Paramount+ and Pluto TV
• Simon & Schuster

(from VIAC 4Q 2020 earnings)

Clearly, Viacom has a reasonably strong set of brands, mostly in the traditional film and TV space but with some expansion into the World of streaming.

Viacom’s peers include Disney (DIS), Comcast (CMCSA) and Discovery (DISCA).

Looking at quality attributes, the company has a Return on Equity (RoE) of 15.9%. This is low in general compared to what I consider high quality, but it is about average for the industry. Return on Capital Employed (ROCE), one of my favourite quality measures, is around 10%. This ROCE is low, both in general and compared to industry (31.6%).

How’s the company doing with respect to sales, earnings, cash flow?

	Dec-16	Dec-17	Dec-18	Dec-19	Dec-20
Revenue per share	29.65	41.46	42.83	43.90	41.05
EPS (nmlz, diluted)	$3.36	$4.13	$4.43	$3.32	$3.06
EPS Growth %		22.92%	7.26%	-25.06%	-7.83%
FCF per share	$3.35	$3.25	$5.06	$1.44	$3.20
Dividend per share	$0.66	$0.72	$0.72	$0.78	$0.96
Payout ratio to FCF	20%	22%	14%	54%	30%
Current price:	$47.00
P/E (2020):	15.4
P/E(5 year):	12.8
P/S (2020):	1.1
E growth (5 yr avg):	-0.68%

Clearly this is a company that has suffered with stagnated earnings in the last 5 years, with zero average EPS growth. It has paid a relatively stable dividend that has stayed well below the FCF per share. The company trades at around 15X 2020 earnings and 13X average earnings of the last 5 years. This is lower than the industry average of approx. 23X.

The company trades at a price to book value of approximately 1.9X. This is also lower than the industry average, which sits around 2.3X.

Free cash flow has been somewhat more volatile, especially in 2019 where FCF per share dropped heavily. This would be worth looking into.

We can also calculate the Ben Graham score (V*), as shown in the formula below:

This formula gives a fair value at 0% growth of $26.01, at 5% growth of $56.51 and at 10% of $87.21.

Let's see how the valuation stacks up against VIAC's peers: 

	VIAC	DIS	CMCSA	DISCA
P/E 2020	15.4	229.0	31.8	30.8
P/E 5 yr AVG	12.8	44.2	28.6	27.8
P/S 2020	1.14	5.11	2.43	2.45

Clearly, the valuation of VIAC based on earnings and sales is well below it's 3 peers highlighted in this table. This shows the company may be undervalued compared to it's peers.

Running a quick DCF gives the following results:

Growth rate	Fair value (10 years of FCF)	Fair value (20 years of FCF)
0%	$27.84	$19.93
5%	$41.77	$25.37
10%	$65.98	$32.51

Looking at the DCF, the company looks fair value if you consider a modest growth of 5% (although this is still less than WACC). At a higher growth rate of 10% or above, the company looks fairly undervalued here.

Using the average 5 year growth rate of 0% however, the current price may not be a great bargain and the company could be overvalued.

The DCF was calculated using a WACC of 9.68%, calculated as below:

CALCULATING V (equity + debt)
E (Shareholders Equity 2020)	16,253.00
Long term debt	19,707.00
V = E+D	35,960.00
CALCULATING Re (cost of equity)
Rrf (risk free rate)	1.50%
Ba (Beta 5Yr Monthly)	1.85
Rm (market rate of return)	9.80%
Re	16.86%
CALCULATING Rd (cost of debt)
Total Debt 2019	21,622.00
Interest Expense 2019	1031
Rd	4.77%
CALCULATING WACC
Tc (Corp tax rate)	21%
Equity Component	7.62%
Debt Component	2.06%
WACC	9.68%

The WACC was impacted by the very high beta of VIAC, at 1.85.

So, we know the company needs to grow. Where's the growth going to come from?

One area could be streaming:

(from VIAC 4Q 2020 earnings)

The company has a goal to increase global streaming revenue by 30% CAGR until 2024. This could certainly put some fire behind VIAC's revenues and give some optimism on future revenue sustainability.

The Paramount+ streaming platform pricing is shown below. It appears to be priced similar to Disney+ and may have enough quality content to justify good value for consumers:

(from VIAC 4Q 2020 earnings)

Aswell as standard streaming platforms, the company has an ad-supported TV streaming service, Pluto:

(from VIAC 4Q 2020 earnings)

Again, the company sees some serious growth in this platform, some of which is likely to be cannibalising the traditional TV platforms which could be on their way out.

The financial health of the company doesn't look ideal. VIAC, with debt of $19.7B, has a debt to equity of 121% which is high, however it has reduced debt from 150% to 121% over the last 5 years. Interest payments are well covered by EBIT (4.6x).

Overall, I think that VIAC seems quite fairly valued on a close look here and was certainly very richly valued at around $100, before it's recent $50 fall.

Compared to peers, however, there appears to be some pessimism. Disney, for example, is trading at a very high valuation due to it's success of DIS+. If VIAC could have some serious success in streaming, it could provide a boost to the revenues of the company and allow some more optimism of the future. Viacom appears to have some pretty strong and loved brands, shows and networks.

I would rate this company as modestly valued, potentially with some scope for writing put options at a cheaper price of around $40 to get some premium, take advantage of the current IV, and potentially buy this company at an even cheaper valuation.

Some risks I identified:

• Growth has not been good - the company needs to invest in it's streaming platforms and ensure it has enough content to compete with it's peers.
• High debt means higher interest rates could be a risk in the future.
• Cable cutting - a risk to all cable networks, and highlights the need to transition the company to the new way of consuming media.