Yahoo Finance ViacomCBS: A Good Bottom Fishing Candidate?
- By Ishan Majumdar
ViacomCBS (NASDAQ:VIAC) has recently been in the news after its stock price crashed post the $3 billion share issuance as well as the sell-off triggered by renowned (now infamous) hedge fund Archegos Capital Management's margin call crisis.
The company's financial performance has been good in 2020, and macro indicators point towards a high probability of success of its new Paramount+ streaming service. It is witnessing growing traction in CBS, Showtime OTT, Pluto TV, Noggin and BET+. Moreover, ViacomCBS has also made significant progress in its cable business by renewing contracts with 13 local TV affiliates from Sinclair Broadcasting. With the increasing vaccine rollouts, there is a strong likelihood of revival in ViacomCBS' other business segments in the latter half of 2021 as well.
Given the artificially low price multiples that the stock is trading at compared to its entertainment peers, could now be at a compelling entry point to pick up shares?
Recent financial performance
ViacomCBS reported a mixed Q4 result, in which it missed revenue expectations but managed to deliver an earnings beat.
The company's top-line of $6.23 billion for Q4 2020 implied a 2.77% growth as compared to the $6.06 billion in revenue reported in the corresponding quarter of the previous year. It underperformed the analyst consensus estimate of $6.88 billion.
ViacomCBS' revenues translated into a gross margin of 38.83% and an operating margin of 14.75% which was lower than that in the same quarter of 2019.
The company reported net income of $810 million and adjusted earnings per share (EPS) of $1.04, which outperformed the average Wall Street expectation of $1.01.
The cash losses for ViacomCBS were disappointing as it burned $271.00 million in the form of operating cash losses and spent another $325 million in investing activities during the previous quarter, implying a cash outflow of nearly $596 million.
Key highlights about Paramount+
ViacomCBS' major entry into streaming services comes with its launch of Paramount+, which combines live sports, breaking news and entertainment and is built on a portfolio of world-renowned brands. The management believes that as the streaming segment continues to evolve and mature, consumers will search for a combination of the genres that have long made linear television popular, and Paramount+ will be the first service to leverage this.
The service is planning on streaming over a thousand live sporting events a year and will feature a content catalog of more than 30,000 episodes and 2,500 movie titles. Additionally, Paramount+ is planning to offer well-informed citizens both the 24-hour news network and local news and weather from 200 local affiliates across America. It is worth noting that some of the biggest and most anticipated new Paramount films will go exclusively to Paramount+, 30 to 45 days after their theatrical release. The rest of the new Paramount movies are expected to appear on Paramount+ after their theatrical run, some as early as 90 days.
With the in-person businesses (theme parks, studios) severely affected due to Covid-19, the company's focus on expanding streaming when demand is high is a solid decision.
The Chilevision acquisition
In April 2021, ViacomCBS announced its plans to acquire Chilevision, which is owned by AT&T (T), as the company looks to boost its streaming audience in Latin America.
Chilevision is a free-to-air TV channel operator that has significant production capabilities, a wide reach and a windowing strategy of its content pipeline through free, paid and premium channels. The acquisition is expected to serve as a valuable marketing vehicle for ViacomCBS' streaming platforms. Additionally, ViacomCBS will be able to distribute Chilevision's existing offerings in sports, entertainment and news in order to cater to increasing demand for Spanish content across platforms, including its premium streaming service Paramount+ and Pluto TV.
It is worth mentioning that this move will not only help expand the company's footprint in the region through programming but also through multiple on-the-ground events, experiences and a substantial consumer products catalog.
Valuation
ViacomCBS' stock fell massively in just one month, which came after the company announced a $3 billion share offering used for its Paramount+ streaming services. The move was not received well by the investors. Additionally, Archegos Capital Management, a key shareholder, sold 30 million shares of ViacomCBS stock in a forced liquidation due to owning the shares on high-margin total return swaps and not being able to make the margin call payments, exacerbating the fall in the stock price.
If we compare the enterprise-value-to-revenue ratio of ViacomCBS to its entertainment peers Walt Disney (NYSE:DIS), Netflix (NASDAQ:NFLX) and Comcast (NASDAQ:CMCSA), we clearly see that after the recent crash, the company is the cheapest of the lot.
Paramount+ has a lot of catching up to do with the rival streaming platforms, but the streaming services macro is strong and the quality of content is also good.
Currently, the company is trading at a price-earnings ratio of 9.64, which is reasonable for a media and entertainment stock just tapping into the streaming market. Overall, I believe that the company could be an interesting bottom-fishing candidate at current levels, though the risks of cord-cutting remain.
Disclosure: No positions.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
This article first appeared on GuruFocus.
