Long only, Deep Value, registered investment advisor, portfolio strategy
Summary
VIAC EV/adjusted OIBDA based on the low-end 2020 estimates is only 6.34 and the stock trades at 5.3x TTM earnings.
The merger of Viacom and CBS gives the company a critical mass that is nearly essential for any substantial TV offering, especially if they keep the relationship with the NFL.
A low valuation and content like Top Gun, South Park, Star Trek, make VIAC a compelling acquisition target for the large digital players.
Cord-cutting is having a radical impact on the entertainment and cable industry, as consumers are determining where and how they want to consume content, making a cable subscription far less essential than in decades past. Unsurprisingly, the stocks of legacy channel and affiliate owners have struggled, while cord-less distributors such as Netflix and Roku are thriving. Mr. Market is known to hate uncertainty, and I believe he has thrown out the baby with the bathwater when it comes to the common stock of ViacomCBS (VIAC). Whichever ways consumers wish to consume their entertainment, content will be the key component for companies to possess. VIAC should eventually either see multiple expansion or it would be an ideal acquisition candidate for a company like Apple, Google, Netflix, or Amazon.
ViacomCBS is a monster of content creation, boasting a library of over 3600 films, 140K TV episodes, and 1.5 billion social media fans and followers. The company spends about $13 billion annually to create this content. Less than three months ago, the combination of CBS and Viacom enabled the company to lead in a multitude of the most important demographics that advertisers are focused on. The combination has given the company a critical mass of content, making it extremely tough for there to be a viable television offering without it. Paramount helps the company create a valuable film ecosystem, strengthening its offerings on various channels such as Showtime and its cable networks. ViacomCBS possesses lynchpin networks such as CBS, MTV, VH1, and Nickelodeon, to name a few. Franchises such as Star Trek, Top Gun, and South Park, are highly valuable, however they are consumed. The company primarily makes money through distributing its assortment of content, selling ads on it, and licensing it into other avenues.
As part of the merger, the company is in the process of consolidating its sales force, streamlining groupings of networks, and integrating digital assets and capabilities. Management increased its annualized run rate for cost savings to $750MM from $500MM. None of this progress was reflected in an ugly Q4 given the timing of the transaction, but long-term the merger should pay real dividends. A major focus for management is building out its own streaming operations, which were bolstered from the acquisition of Pluto TV for $340MM in early 2019. Pluto TV ended 2019 with 22.4MM monthly active users. Domestic streaming and digital video revenue totaled $1.6 billion for the year, growing by 60%.
For 2019, Advertising generated $11.074 billion of revenue, with Affiliate and Content Licensing, bringing in $8.602 billion and $6.483 billion respectively. All three divisions saw growth YoY. Publishing revenue declined by 1% to $814MM, while Theatrical was down 26% to $547MM. TV Entertainment and Cable Networks brought in adjusted OIBDA of $2.443 and $3.515 billion, respectively. Filmed Entertainment and Publishing had adjusted OIBDA of $80MM and $143MM, respectively.
Adjusted free cash flow in 2019 was $1.24 billion in 2019, and management believes that the figure should grow to $1.8-$2B in 2020, with additional growth in the following years. This growth would be bolstered via roughly $750MM of efficiency savings from the recently closed merger between CBS and VIAC. 2020 guidance suggests mid-single-digit revenue growth, including 35-40% Domestic Streaming & Digital Revenue growth. Adjusted OIBDA should be between $5.8 billion-$6.1 billion, up from $5.5 billion in 2019. Adjusted diluted EPS is forecast to be between $5.15-$5.50, up from $5.01 in 2019.
At a recent price of $28.26 and with 615MM diluted shares outstanding, VIAC has a market capitalization of roughly $17.4 billion. The enterprise value is approximately $36.8 billion, as the company has about $18 billion in long-term debt and another $2 billion in pension obligations. In 2019, the company had total revenues of $27.812 billion, up from $27.25 billion in 2018. Costs grew at a more rapid rate however, escalating from $22.046 billion in 2018, to $24.088 billion in 2019. Operating income dropped to $4.273 billion, from the $5.204 billion in 2018. Net earnings for 2019, were $3.308 billion, or $5.36 per down slightly from $3.455 billion, or $5.56 per share.
EV/EBIT over the trailing twelve months is roughly 8.6x, and the TTM P/E is around 5.3x. Using VIAC’s low-end projected 2020 adjusted OIBDA of $5.8 billion, the EV/adjusted OIBDA is only 6.34x. That is way too cheap for a capital-light company, with the assets of VIAC. It is tough for me to believe that if the stock continues to languish, a buyer such as Apple, Google, Amazon, or Netflix wouldn’t emerge. Think of how much more compelling their offerings would be with the types of essential channels and brands that VIAC possesses.
Management stated that they have the willingness to opportunistically buy back stock, in addition to their deleveraging efforts, which are understandably a priority. Long-term, the company wants to get debt/adjusted OIBDA to 2.75, from about 3.4x currently. VIAC pays a dividend of 96 cents a share annually, which is good for a 3.4% yield based on current prices. 2020 should be a good year with a likely record amount of political advertising coming around, along with big movies release like Top Gun 2 and Sonic. For the long-term investor, VIAC has the potential to rise to around $46, based on an 8x multiple of 2020 adjusted OIBDA. This would still be less than 10 times earnings per share, so hardly a heroic achievement, from a multiple expansion standpoint.
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