When I was asked to select a Stock of the Year for 2020 I did not approach the request by looking solely at the upside of the selection. Rather, it is my view that we should search for stocks with the most compelling upside reward relative to downside risk.
Accordingly, my pick is ViacomCBS Inc. (VIAC) , which has almost 40% upside potential (to $57.50) but downside risk of only about 10% (to $37.00). That's a reward/risk ratio I find tantalizing.
Here are the key attractive characteristics that make shares of ViacomCBS, which is a holding of Jim Cramer's Action Alerts PLUS charitable trust, appealing:
* Critical size - The combined company will be the largest television owner in the U.S. as measured by viewers. It also will own some very valuable film and TV production facilities as well as faster-growing digital streaming businesses.
* Price (reward vs. risk) - I am fully aware that the new CBS is something of a maturing asset due to the likely secular deterioration of revenue and profitability attributable to cord cutting and digital disintermediation. Even so, the numbers seem compelling: 2020 sales should approach $30 billion, cash flow should be more than $6.25 billion and earnings should be around $6.30 per share. For 2021 my preliminary earnings estimate is $7.00 per share.
* Opportunities- Given EBITDA generation, the current level of debt (in line with management's targets), the opportunities from executing the amalgamation with about $500 million of synergy potential of the two companies and the low valuation, I expect a large, accretive stock buyback to be announced.
* Strong management - CEO Bob Bakish is the real deal. He will not waste money on the company's core and maturing businesses. He will focus on free cash flow and emphasize licensing content opportunities to third parties.
* Valuation - The market cap of ViacomCBS is only $23 billion. The shares trade at around only 6.5x 2020 EPS estimates and it has a nearly 11% free cash flow yield. On a sum-of-the-parts basis, ViacomCBS is probably trading at around a 45% discount to market value. A discounted cash flow model, even using negative terminal growth and a relatively high-weighted cost of capital, produces a price target of $52 to $54 a share compared to the recent price of around $41 a share.
* Good growth prospects relative to low valuation - 2020-21 annual sales should grow by about 8%, cash flow by 11% (free cash flow by 20%) and earnings per share by close to 15%
Meanwhile, there are a number of potential near-term catalysts that investors might not be considering. These include:
* The company is planning an investor day aimed at focusing on synergies and strategic opportunities
* A good 2020-2021 upfront
* An announcement of a large share buyback (I anticipate about $600 million of buybacks in each of the next two years)
* Non-core asset sales, such as the recently announced sale of CBS headquarters
* Affiliate/retransmission renewals (over half of CBS retrans renews and about one-third of reverse retrans renewals in 2020)
And that's why I'll have my eye on ViacomCBS in 2020.