I made the value case for ViacomCBS (VIAC) stock around two months back. At the time, the owner of Showtime, Nickelodeon and MTV traded for about $16 per share – some 15% below the current $19 stock price. It is strange to think that the CBS/Viacom merger only completed last December; it feels like a lifetime ago given what has occurred since. Anyway, I note the company has released its 1Q20 numbers in the intervening period. Those obviously give us something a bit more concrete to go on, although it looks like the current quarter will be the worst.
On that note, let’s take a look at its first quarter figures. Total company-wide revenue came in at a shade under $6,700m, down around 6% year-on-year. Breaking that number down a bit further, and it appears that advertising took a pretty big hit. The company recorded total advertising revenue of $2,484m, down around 19% on the equivalent period last year. The loss of Super Bowl ad-revenue (which CBS aired last year), and the NCAA men’s basketball tournament (cancelled due to COVID-19), obviously explains that. Strip those two out of the equation, and ad-revenue actually clocked in 2% higher year-on-year.
Affiliate revenue came in at $2,197m for the quarter – basically unchanged on last year’s figure. Again, not particularly surprising. We’d expect the money that pay-TV providers pay for ViacomCBS’s cable channels to hold up reasonably well, unlike ad-sales. The company also grew its content licensing revenue (i.e. company-produced content sold via third parties). That figure came in at $1,594m for the quarter, around 9% higher than in 1Q19. Profit for the period came in at circa $500m, with adjusted free cash flow clocking in at around the same area. With its quarterly dividend costing just under $150m, there was even some cash left over.
Viacom stock is still absurdly cheap in my view. I mean, just take a look at that 5% divided yield for starters. In normal times, the ViacomCBS dividend would only cost it circa 20% of its profit. Normalized earnings would have clocked in at around the $3,000m mark, while its current quarterly payout costs it $590m on an annualized basis. It is a sign of how beaten down the stock is that a 20% payout ratio still translates to a 5% dividend yield.
On that note, I think its distribution is in reasonable shape. This quarter will be a complete horror show, but for the year as a whole it will be okay – the company should still generate a chunk of retained profit to deal with its debt load. It also raised circa $2,500m in fresh long-term debt last month. It used a chunk of that to redeem around $800m worth of debt maturing next year. That comes on top of the $590m in balance sheet cash recorded at the end of 1Q20. The company has ample liquidity to see it through the sticky patch.
The Value Case
If 2020 were a normal year, ViacomCBS might be expected to make somewhere in the $5 per share region in terms of net profit. Its current stock price is around $19. It is, at first glance, deep in the value bin. The debt load – which I have as equivalent to around $29.25 per share net of cash – makes things a bit less obvious.
Still, take a slightly longer-term view of things and the outlook looks okay. It doesn’t need to grow its profits whatsoever, except maybe to recover what was lost to COVID-19. To put some numbers to that statement let’s start with its cashflow. Imagine ViacomCBS generates $15,000m of cash from its media empire over the next five fiscal years. It probably needs to spend circa $2,500m on CapEx (cumulative), so that leaves $12,500m surplus. I think that is a reasonably conservative estimate based on previous profit projections.
(ViacomCBS: Pre-COVID-19 Estimates)
If it did nothing but carry on paying its current 24¢ per share quarterly payout, then dividends would consume a further $3,000m over the next half-decade. That leaves us with a total surplus of $9,500m. Here’s where it gets interesting. I’m going to assume it just pays down debt with that, nothing else. This is unrealistic given the company’s actual leverage target, but I’m taking the most conservative road here.
Anyway, that leaves a debt load of circa $9,000m at the end of 2025. Assuming it maintained its current $30,000m enterprise value, that means we would be looking at around $21,000m for the equity portion. Some back of the envelope calculations puts the implied stock price at $35 based on 615m shares outstanding. So, to sum up – we have a terminal stock price of $35, plus another five bucks or so in cumulative dividend cash. If you run the numbers on that, it points to annual returns in the 16% per annum range.
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