Two weeks ago, I made it known that I saw a lot of promise in the merged media giant ViacomCBS Inc. (VIAC) . Today, I feel even stronger about its potential than I did then, which is leading me to raise my price target for ViacomCBS from $53 to $57.50.
Here are a few bullet points as to why. I'll elaborate on them below:
* Trading under $40 a share, ViacomCBS has a market cap of only $22 billion
* 2020-21 annual sales should grow by about 8%, cash flow by 11% (free cash flow by 20%) and earnings per share (EPS) by close to 15%
* The shares trade at only 5.75x GAAP EPS, at 6x EV/EBITDA, possess a nearly 12% free cash flow yield and have close to a 3% projected dividend yield
* VIAC offers a very favorable reward vs. risk in an arguably overvalued market
"You can't get killed falling of a curb."
-- Grandma Koufax
Generally speaking and especially given the time of year, with the continued change in market structure in which price momentum is a key criterion for stock selection, losers are thrown out of portfolios in favor of stocks with strong price action.
The predecessor companies to the ViacomCBS merger (Viacom and CBS) over the last few months had been horrible stock performers and were ignored by traders and investors.
I believe that over the next year this will change.
The amalgamation of Viacom and CBS reassembles a large content monetization machine that includes CBS's legacy entertainment assets (among them the CBS network, a TV production studio, CBS All Access and owned-and-operated stations as well as Showtime and Simon & Schuster) and Viacom's legacy assets (seven flagship cable networks, Paramount Pictures, international broadcast networks and Pluto TV).
While the industry is under siege from disruptive technology and a move in advertising to digital media, these are proven brands that provide scale (particularly in the Pay TV arena), a huge and underutilized content library, expanding direct-to-consumer (DTC) businesses (CBS All Access, Showtime, BET+ and Pluto) and large monetization opportunities given the combined company's well over 20% viewership share but only 10% affiliate fee share.
As well, the $500 million cost and revenue synergy guidance may be too low in light of the above operating scope.
Given the rising stock market in general and the climb in peer group stock prices in particular, I have raised my price target for ViacomCBS by adjusting upward my forward price-to-earnings (P/E) multiple assumption and free cash flow multiples.
Pay Attention to Near-Term Catalysts
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)
As to the risks of higher costs of sports contracts (e.g., NFL renewal, etc.), continued pay TV sub losses and higher content spend, I believe these are all known and are incorporated in the currently low valuation.
In early December's, in "Tuning in to CBS," I explained my initial rationale behind owning ViacomCBS (the merger was effective Dec. 4). I wrote at that time:
If timed properly, CBS (CBS) has been a profitable investment, at times, over the last few years.
We initially purchased the stock in the high $30s and sold it around $50-$51.
Until yesterday (when I re-initiated a long position) I have avoided the shares over the recent drop from over $50 to under $40.
Yesterday afternoon CBS closed its acquisition of Viacom (VIAB) - the new company is named ViacomCBS (and the stock symbols have been changed to (VIACA) and (VIAC) (class B).
What has changed for my about face?
* Critical size - The combined company will be the largest television owner in the U.S. (as measured by viewers). It will also own some very valuable film and TV production facilities as well as faster growing digital streaming businesses.
* Price (Reward vs. Risk) - Though I am fully aware that the new CBS is something of a maturing asset (reflecting the likely steady secular deterioration of revenues and profitability because of cord cutting/digital disintermediation). But, even so, the numbers still seem compelling. 2020 sales should approach $30 billion, cash flow over $6.25 billion and EPS of $6.30/share. For 2021 my preliminary EPS estimate is $7.00/share.
* Opportunities- Given EBITDA generation, the current level of debt (in line with management's targets), the opportunities from executing the amalgamation (about $500 million of synergy potential) of the two companies and the low valuation - I expect a large (accretive) company buyback to be announced.
* Strong Management - Bob Bakish is the real deal. He will not waste money on its core and maturing businesses. He will focus on free cash flow and emphasize licensing content opportunities to third parties.
* Valuation - ViacomCBS trades at around only 6.5x 2020 EPS estimates and has a near 11% free cash flow yield. On a sum of the parts basis, CBS 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-$54/share (compared to the current price of $40/share).
Trading at under $40 a share, ViacomCBS has a market cap of only $22 billion. ( You can't get killed falling of a curb!)
ViacomCBS's annual 2020/2021 sales should expand by about 8%, cash flow by 11% (free cash flow by 20%) and EPS by close to 15%.
The shares trade at only 5.75x GAAP EPS, at 6x enterprise value (EV) to EBITDA, possess a nearly 12% free cash flow yield and have close to a 3% projected dividend yield
Since my initial analysis I have reworked my numbers, which suggests my initial 12-month price target of about $53 a share may be about $5 a share too low.
With an upside of 40% to 45% and downside of only about 10%, ViacomCBS offers a most attractive reward vs. risk in an arguably overvalued equity market.
ViacomCBS is on my Best Ideas List.
(This commentary originally appeared on Real Money Pro at 8:30 a.m. ET on Dec. 17. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass' Daily Diary plus columns from Paul Price, Bret Jensen and others.)