How interesting is it that CBS Corp. (CBS) reported third-quarter financial results on Tuesday morning, the same day that the Walt Disney Co? (DIS) launches its brand-new Disney+ streaming service.
How interesting is it that CBS reports just two days ahead of Viacom (VIAB) , and one month ahead of the expected closing of that merger?
How interesting is it that these numbers that come chock full of rising expenses come just one day after news breaks that Acting CEO Joe Ianniello will not only receive a $70 million severance for not being named as head of the combined companies upon the merger, but an additional $30 million ($20 million in stock) for agreeing to stay on as head of the CBS side, reporting to current Viacom CEO Bob Bakish, who has already been named CEO of ViacomCBS once said deal closes?
What is that, you ask? Precisely. Ianniello will receive a large severance even though he is not losing his job, and an added bundle for agreeing to stay on in what amounts to something similar to his current post.
Things that make you go hmmm.
The Quarter
For the quarter ended September 30, CBS reported adjusted earnings of $0.95 per share. Though that number paints a picture of a 23% decline, EPS did manage to top Wall Street's consensus view. Revenues generated, at $3.3 billion, did grow, albeit just 1.2% year over year. However, that number fell short of professional expectations.
By business segment, Entertainment (69% of the whole) produced sales of $2.28 billion, landing precisely on consensus. Cable Networks at $563 million, Local Media at $406 million, and Publishing at $217 million all fall short of what was expected to varying degrees. Revenue by type might be concerning. Though there was some growth in Affiliate & Subscription Fees as well as Content Licensing & Distribution, there was an outright decline from the comparable quarter one year ago for advertising. This has been an area of profound growth for a number of companies in recent quarters.
Adjusted operating income experienced a 21% decline year over year. In fact, the only segment that saw growth here, was the least significant, Publishing. This is explained as a result of not only merger-related costs, but an increase in investment in content being produced across multiple platforms to include CBS's effort to compete in the direct-to-consumer streaming entertainment wars.
For the quarter, CBS was able to print operating cash flow of $27 million, resulting in free cash flow of $-7 million (Yes, that's a negative number). This would obviously be well off of third-quarter 2018, when the company posted operating cash flow of $137 million, and free cash flow of $97 million to the tape.
The Merger
Roughly two weeks ago, Shari Redstone's holding company, National Amusements, which holds a controlling stake in both CBS and Viacom, gave formal approval to this merger. This is the result of a multi-year effort. The deal is expected to close in early-ish December.
The agreement is for an exchange ratio of 0.59625 a share of CBS for each share of Viacom. At that time, CBS will be renamed ViacomCBS. The stocks will de-list, and reissue class A (VIACA), and class B (VIAC) shares.
My Thoughts
I view Viacom as the better of the two companies, pre-merger. We'll know more about Viacom's most recent, and final stand-alone quarter in just two days, but I do see that stock as cheap. Will Viacom show a better performance in advertising? Better than CBS, I should hope.
My thought is that an investor really does not need to be in either of these names, but if one cares to be involved ahead of closing, my choice would be Viacom, based upon valuation as well as recently poor performance for this equity. In fact, I bought a few of these shares on Monday morning after mentioning the stock in my Market Recon column.
(Disney and Viacom is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
