Jeff D. Opdyke
If you’re a media company and your name doesn’t rhyme with Pet Licks, then these days you’re pretty much compania non grata (which is not the proper way to say that in Latin, but you get the gist).
Nothing against the Big N, but it sucks up so much oxygen that its breathless flagbearers on the Street seem to forget that other media companies exist, and that some of them are worthy of a spot in a portfolio. And here I’m thinking of ViacomCBS (VIAC), the media giant that resulted from the 2019 marriage of, well, Viacom and CBS.
Purely based on valuation, Viacom is cheaper than a bag of rocks.
- Forward P/E: less than seven
- Price/sales: 0.7
- Price/book: 1.2
It’s not like Viacom is some Old World media has-been with limited growth prospects. Its profit margins are up near 12% and its year-over-year revenue growth is near 65%, marking it one of the Street’s profitability/growth leaders. Netflix (NFLX), by comparison, sports profit margins just above 9% and saw year-over-year growth of just under 25%. That’s not to imply Netflix is an inferior investment, just that Viacom is a worthy one.
The big knock against ViacomCBS is its sizable debt load of just under $20 billion, or 1.6x shareholder equity. But the thing is, all the way out to January 2025, maturities range from just $35 million to $841 million, amounts Viacom can manage without much strain. Moreover, the company is in the process of selling off CNET and Simon & Shuster. Combined, those assets should fetch vaguely $1.5 - $1.7 billion, which will help right-size the balance sheet. (Netflix has more than $15 billion in long-term debt, or 2.2x shareholder equity, just for a point of comparison.)
It’s true, as well, that Viacom faces some fundamental issues as consumers continue the cord-cutting trend as they gravitate to streaming services. But here, too, Viacom is moving in the right direction with the popular CBS All Access, as well as a “super service” that will stream a wide range of original and library content from brands including MTV, Comedy Central, Nickelodeon, Paramount, Showtime and others. That’s coming in early 2021 – and, better yet, it’s going to be a global service, initially focused on Australia, Latin America and the Nordic markets. That’s going to opening up ViacomCBS to a vast audience of potential customers.
All told, then, Viacom looks to be an undervalued media play with meaningful growth prospects ahead.
Viacom has two share classes: Viacom A (VIACA) and Viacom B (VIAC). The only difference is voting rights, which only the A shares have. Yes, there’s value in voting rights, but, frankly, not enough value for me to choose A over B. Instead, I prefer the B shares. They’re cheaper both nominally ($28.75 vs. $31.18) and in terms of valuation (6.98, forward P/E vs 7.76). Plus, they sport a larger yield (3.13% vs. 2.89%).
In the landscape we now find ourselves – oxygen-deprived valuations for Wall Street as a whole and a near-zero interest-rate world – VIACB is a slightly better buy, assuming you don’t care about voting rights.
Frankly, in a downdraft – and one seems likely and imminent – I’d much prefer to own a stock with a mid-single-digit PE and an S&P-topping yield, than an overhyped streaming service trading on the bleeding edge of perfection. When you’re Netflix and you’re trading at more than 80x forward earnings because investors except every tomorrow is going to be better than today, the air pocket beneath you is quite deep. (Depending on the severity of the market’s downdraft, price support for Netflix, now near $520 per share, looks to be in the $250 range).
Meanwhile, Viacom, trading at forward PE so small it’s almost a rounding error, likely has downside support in the $20 range. The shares are already down more than 30% so far this year, though they are trending back up.
If we give Viacom a generic, unremarkable 12 PE, and apply that to full-year earnings likely to be in the range of $4.20 share, you have near-term upside of $50.
Not a bad risk/reward ratio.