ViacomCBS (VIAC) is a major media and entertainment company, owning highly recognized properties including Nickelodeon, Comedy Central, MTV and BET, the Paramount movie studios, Showtime, and all of the CBS-related media assets, notes Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.
Its brands are powerful and enduring, typically holding the #1 market shares in the highest-valued demographic groups in the country. ViacomCBS’s reach extends into 180 countries around the world. Viacom and CBS re-merged in late 2019 and are now under the capable leadership of former Viacom CEO Robert Bakish.
Viacom is being overhauled to stabilize its revenues, boost its relevancy for current/future viewing habits, and improve its free cash flow. Its challenges include the steady secular shift away from cable TV subscriptions, which is pressuring advertising and subscription revenues.
The pandemic-related reductions in major sports are also weighing on VIAC shares. However, ViacomCBS’s extensive reach, strong market position and strategic value to other, much larger media companies, and its low share valuation, make the stock appealing.
As part of its overhaul, Viacom is shifting away from advertising (currently about 36% of revenues) and affiliate fees (currently about 39% of revenues), toward content licensing – essentially renting its vast library of movies, TV shows and other content to third-party firms like Netflix and others.
Viacom is building out its own streaming channel (Paramount+) and other new distribution channels, which are generally showing fast growth. Ultimately, we think the company may be acquired by a major competitor, given its valuable businesses and content library, as well as its bite-sized market cap of about $20 billion.
Viacom reported a reasonably good third quarter, with adjusted profits down 17% from a year ago, but about 14% above consensus estimates. Revenues fell 9% but were slightly higher than estimates.
The company generated $1.4 billion in operating cash flow and $1.3 billion in free cash flow. The cost-cutting program is well-underway and boosting cash flow. However, cash flow ultimately needs to be higher.
So far this year, ViacomCBS has reduced its debt net of cash by about $1.5 billion, or 8%. Cash remains robust at $3 billion.
ViacomCBS shares trade at about 8.2x estimated 2021 EBITDA, which we believe undervalues the company’s impressive leadership and assets.
On a price/earnings basis, VIAC shares trade at 8.0x estimated 2021 earnings of $4.31 (estimate slipped 3¢ from a week ago). ViacomCBS shares offer a sustainable 2.8% dividend yield and look attractive here.
