It is crazy how cheap media firm ViacomCBS (VIAC) got in the early part of last year. I mean, the CBS and Paramount Pictures owner last featured here back in May 2020. It traded for circa $19 a share at the time. Prior to that, it was covered in late March, just when COVID really got going. The shares changed hands for circa $16 each at that point, or roughly 3x pre-COVID estimated earnings per share (“EPS”). These days? Viacom stock trades around the $80 mark, or a 300% increase since last May. What a rollercoaster 12 months.
Most folks probably know the business quite well. ViacomCBS is a sprawling media company that operates one of the big broadcast networks in CBS, as well as a host of pay-TV assets like Nickelodeon, Comedy Central, MTV and premium network Showtime. As mentioned above, it also owns movie studio Paramount Pictures, whose vast film library includes the Mission Impossible series. The firm mostly makes its money via advertising, affiliate fees, retransmission fees to its broadcast network, and from licensing its content to third parties.
The value case back then was obviously pretty easy to make. Notwithstanding significant uncertainties, the cashflows associated with affiliate fees looked solid. These fees include what pay-TV providers pay the firm to distribute its cable networks like Nickelodeon, meaning they do not typically follow the ups and downs of the economy. Advertising revenue, which makes up 40% of total sales, presented a much bigger question mark given its cyclicality and the wholesale cancellation of live sporting events. The loss of last year’s NCAA Basketball Tournament cost CBS a few hundred million bucks on its own. Net debt of around $18b also looked quite chunky. Still, the stock traded on a price-earnings ratio (“PE”) of 3-4 and its dividend, which yielded 5-6% at the time, appeared well covered.
Full year 2020 results largely confirm the qualitative view above. Company-wide sales clocked in at $25.2b, down around 6% year-on-year (“YOY”). That included a 12% slump in advertising revenue, which came in at circa $9.75b for the year. Affiliate fee revenue rose 7% YOY. The firm’s TV Entertainment segment, which houses broadcast network CBS and generates half its sales from advertising, saw adjusted operating income before deprecation and amortization (OIBDA) slump 24%. Again, that chimes in with the above. Company-wide adjusted net income fell 13% to $2.6b, or $4.20 on a per-share basis.
Turning to the balance sheet, and gross debt ended last year at just under $20b versus circa $3b in cash & equivalents. Quick math puts leverage here at around 3x OIBDA. Interest expenses totaled just over $1b last year. Note that full year 2020 free cash flow of $1.9b easily covered the $600m annual dividend bill with change. Over 75% of its financial debt is due after 2025, with none due this year. It also agreed a deal to sell publishing firm Simon & Schuster for just over $2b.
So, the million-dollar question – why is the stock on an absolute tear? Three reasons in my view. Firstly, we have the obvious recovery from COVID. ViacomCBS stock began 2020 at around $40 a share – it got pounded in the initial sell-off, so a recovery always seemed logical. That is especially true since business also recovered in the later part of the year. The firm even saw advertising revenue grow in the fourth quarter, partly thanks to election year political spending. Advertising sales increased 4% year-over-year to $3.15b last quarter. Other than that, it seems like its streaming activities might provide an explanation. Obviously these benefitted greatly last year due to the various lockdown restrictions. The firm counted around 30m streaming subscribers worldwide at the end of last year, up 56% YOY. Global streaming revenue came in at around $2.6b, a roughly 50% rise YOY.
On top of that, the firm recently announced its latest streaming offer, Paramount+, which replaces CBS All Access. This looks set to be a pretty comprehensive service that will include everything from original scripted entertainment to live sports and news. The firm does, of course, also have a vast library of historical shows and movies too. Management targets net subscriber growth of circa 45m out to 2024, taking total streaming subscribers to around 75m. That is seen driving total annual streaming revenue to around $7b over the same period. That will be accompanied by a circa fivefold increase in annual content costs, from $1b to $5b, though that also includes shifting some investment from traditional TV. The total content budget clocked in at around $15b last year.
The final point I would make concerns the ownership structure and the Redstone family. Before the 2019 recombination with CBS, Viacom had long been in the dog house with investors. The situation between Sumner Redstone and Shari Redstone was messy to say the least, with National Amusements, the Redstone family holding company, owning most of the voting stock. Sumner Redstone has since passed away, while the recombined firm is stronger than the two separated ones. As a result, speculation that it will be acquired by a bigger player has increased, and has possibly fueled some of the price rise here.
Viacom shares currently change hands for just under $80 each, up circa 7.5% on last week’s close. We can perhaps pin some of that performance on Sunday’s Oprah Winfrey interview with the Duke and Duchess of Sussex, which aired on CBS and looks set to be a money spinner. Still, that move alone added nearly $3.3b to the market-cap, which seems excessive. The dividend – $0.96 per share in annualized terms – represents a current yield of just 1.15%.
At the risk of stating the obvious, that now looks fairly rich. Analysts do not expect much by way of earnings growth here over the next few years. Growth prospects in the traditional-TV space need no further commentary, while streaming will require investment as well as time to scale up. Not that many streaming services have managed to achieve profitable status yet.
Annual EPS looks to be somewhere in the $4-5 region here, and that puts the stock at a PE in the 17-20 area give or take. That this represents a fourfold rise in the space of just 10 months tells you how badly beaten down it was. Still, that also means that the value case no longer really exists here anymore. ViacomCBS is a decent business with some good assets like CBS and Nickelodeon. But it is one whose fair value is perhaps closer to the 10-13x earnings range rather than 17-20x earnings.
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