ViacomCBS Is A Buy Based On Content, Valuation And Motivated Management – Seeking Alpha

Posted: December 23, 2019 at 10:42 am

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It's finally happened: CBS and Viacom are now one company again. ViacomCBS (VIAC) (VIACA) will be more powerful as one entity than as two separate media concerns. That's because Hollywood currently favors scale of content and platform in the streaming era. It's also because Viacom has been coming off several years of fundamental underperformance with its theatrical slates, subpar management and challenging cable environments (i.e.: think consumers ditching linear for broadband-driven subscription services).

With CBS now attached, the company can arguably look ahead now to the future. CEO Robert Bakish is tasked with getting the stock into growth-mode. With Disney (DIS) and Netflix (NFLX) the dominant players in streaming, Bakish's challenge will be to develop great content as well as design (or sell to) the best platforms to deliver that content. This will require acquisitions as well as careful re-investment of incoming cash flows. I believe this is a stock that is a long-term buy, but because it is basically a new idea post the re-merger, I will call it by necessity a speculative consideration.

One of the prime reasons why the stock is of interest is because one might naturally assume that this new era in the company's history represents what is essentially an inflection point. Such a transitional period could mean that the management team is now incentivized to aggressively pursue new avenues of growth.

And this will mean that new ideas will be incubated and executed. There will be failures, of course, but I doubt shareholders will revisit the doldrums inflicted upon them during the Philippe Dauman regime.

At a recent conference, Bakish talked about his vision for the company. The word synergy has made a comeback of sorts for the CEO; in fact, his comments remind me of another time in media, when linear ruled the roost and repurposing content via cable channels was a popular method of amortizing investment costs.

His comments also come with the context of the stock being cheap, in his mind. As the article points out, the stock is indeed trading in the mid single-digit P/E range. Bakish certainly wants to make a big splash, and he may have an easy time of it propelling the stock to a higher premium, at least initially. That's because he will be looking to make an impression quickly.

Being incentivized means, in part, searching for ways to maximize the financial position of the company. I like two things that were mentioned: asset monetization and a stock buyback.

Of the two, asset monetization is the more highly valued, in my opinion. Deadline reported on the move Bakish made regarding the company headquarters, and while such a real estate transaction is a valid approach, I'm hoping to see other kinds of sales that will target assets linked to previous investments. For instance, Simon & Schuster might make for a reasonable sell idea. Awesomeness TV isn't necessarily a core concern at the moment and also could be considered (I do like this asset for certain reasons, but perhaps ViacomCBS would find too much overlap with it). I foresee a full review of the portfolio with an eye toward selling some significant parts. I also would see potential for some creative selling. As an example, the Indiana Jones library could be sold off in full to Disney (DIS). The company might also search for other parts of its library that could be let go.

A stock buyback also would make the shares attractive as it would show management's confidence in the future, but it could of course come with risks. The company should concentrate on producing content and promoting its platforms first and foremost. Nevertheless, returning value to shareholders is a perennial goal for most companies, and given the aforementioned P/E ratio, it arguably isn't a bad time to take back some of the float.

The company will undoubtedly look to make some purchases. Although Bakish seems reticent to discuss any strategy regarding this part of the thesis, I still believe that Lions Gate Entertainment (LGF.A) (LGF.B) remains essentially on the table. Purchasing that studio would scale up ViacomCBS's library content quickly.

The company also is examining investing in the Miramax library. I'd prefer a total purchase as opposed to an equity stake, but the point here is that Bakish clearly wants access to as much branded content as possible. Depending on the dynamic of the rights held within this library - and you can bet they are complicated and ambiguous at points - ViacomCBS can create reboots and prequels and sequels to all kinds of stories and characters. This will in turn help to drive other parts of the newly-merged conglomerate.

If the company can scale up a bit, then it also might make itself attractive to a potential bigger media concern in the future. That also must be taken into account when considering an investment in this new stock. Some ideas of potential purchases in my mind are some of the smaller studios/libraries such as A24 and comic-book entity Archie Comics. Hasbro (HAS) of course has already purchased eOne, but these concepts represent the type of smaller-scale buys that could interest management down the road.

ViacomCBS has several linear and non-linear platforms that deliver content.

Showtime is a well-known cable channel that is also trying its hand at the OTT paradigm. The service has over 27 million subscribers. Content such as Homeland and Ray Donovan have played well with viewers. The hope is for the OTT version to continue to expand, as well as total subscriptions overall. With all the different services out there, this will be tough, especially given CBS's All Access product existing as a potential cannibalizing factor. Access is a total direct-to-consumer play that is powered by the Star Trek and Twilight Zone brands. According to this Variety article, the OTT version of Showtime, combined with Access, counts 8 million subscribers. That's a small number, but it also implies a growth opportunity.

The company also owns Pluto TV. This is an ad-supported service that has a plethora of dedicated channels (e.g., a channel that shows only Doctor Who episodes, as well as channels that show only certain reality shows, etc.). The asset was purchased for $340 million by Viacom about a year ago. Bakish said at the aforementioned conference event that the service is worth much more today based on viewing levels and active-subscriber counts (and, one would presume, additions to the lineup). The linked article mentioned 20 million active viewers in a given month. This also represents a growth opportunity, as well as an opportunity to create another subscription-based offering. And just as Disney is bundling its streaming services, ViacomCBS could indeed grow the OTT business via bundling strategies.

The company also owns MTV Networks, which is driven by MTV and Nickelodeon, and the Paramount Network. Obviously linear is under siege to some extent, and Wall Street prefers hearing about non-linear stories, but this part of the conglomerate nevertheless can help to drive value long-term. The cable nets aren't going away, and content pipelines that start on MTV can end up on Access or Pluto, and vice versa. In addition, I hope management sees fit to try day-and-dating some Paramount movie projects with its streaming components (that would even include Showtime), or near day/dating them (i.e, bring a new movie release to Access/et cetera perhaps in less than a month's time while still keeping it in theaters).

As I've stated, the stock seems to be inexpensive. Looking at many metric indicators in the SA quote system, such as P/E, P/sales, enterprise value metrics, et cetera, the shares come away attractive. However, overall, SA gives the stock an average rating because of cash-flow concerns (which is important to consider).

The company declared a dividend recently of $0.24 per share according to SA. Right now, that would put the yield at over 2%. That won't place the stock on the radar of income investors, but for a media concern, that isn't too bad.

Right now, I think it is difficult to consider the company on a total quantitative basis since we haven't gotten any quarterly reports yet since the merger. Obviously we're going on past history and analyst predictions, which is fair enough.

However, I'm leaning toward the qualitative side of this story. Viacom and CBS will prosper together as a cohesive unit; I am bullish on the synergy scenario as laid out by Bakish. The CEO should have something to prove, so like I've argued, his future legacy is linked to how well he manages the company for shareholder value.

ViacomCBS obviously is not a disruptive IPO, but this is a new beginning. Put this stock on a watch list at the very least; buying it on a somewhat speculative basis (given that we haven't seen quarterly data yet) with a long-term frame of mind is also something to consider.

Disclosure: I am/we are long DIS, LGF.A, LGF.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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ViacomCBS Is A Buy Based On Content, Valuation And Motivated Management - Seeking Alpha

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December 23rd, 2019 at 10:42 am

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