One of the things that I like about being a value-focused, long-term oriented investor is that I don’t spend a lot of time hunting for investing opportunities among stocks that I don’t know anything about. Over the years, I’ve been able to put together a good watchlist, filled with a pretty representative sampling of stocks from just about every part of the market. That means that in a lot of ways, I don’t have to spend a lot of time getting to know a company from scratch; most of the time running through a new analysis really just means refreshing the data for one of these old friends to see where things now stand.
ViacomCBS Inc. (VIAC) is one of those stocks; I’ve been following it now for most of 2021 and been able to use it on multiple occasions in a practical sense for my income-generating system. From late March to the first part of April, VIAC was one of the attention-grabbing stories in the market due to its plunge from a peak at around $102 in less than one week to below $50. VIAC announced announced at the time that it would be selling new shares to the market, which diluted the value of existing shares, precipitating a 25% drop shortly afterward. The real story started from that point, as “family offices” – large investment funds set up exclusively to manage its own money rather than soliciting client funds – who were over-leveraged on this stock were forced to start selling other positions to cover margin calls on its borrowed assets. Increased selling – not just by this family office, but other investors as well – precipitated more declines in VIAC’s stock price, accelerating the decline even more.
The tendency for most investors is to shun stocks in free fall, which means that for the average growth investor or short-term trader, VIAC quickly became radioactive – an idea that seems to have picked up pace in the last month as broad market uncertainty has increased. That perception is countered, however by the fact that, while not immune from pandemic difficulties, VIAC’s underlying fundamentals have nonetheless continued to be very strong throughout the year. This is a company that was formed by the merger of two broadcast media giants – Viacom and CBS – to be more effective as a combined company in an ever more competitive landscape in the broadcasting and entertainment industry. Traditional broadcast channels – cable, satellite TV, and so on – continue to be affected by “cord-cutters” that are shifting more and more to streaming channels. Cord-cutting doesn’t just apply to movies and TV series, but also for sports programming. Amazon, for example paid a king’s ransom earlier this year for exclusive rights to Thursday Night Football, and VIAC is moving to stay just as relevant, having overpaid for an extension of its NFL contract, and also adding Euroleague soccer to its streaming lineup as well.
This is a stock that rose from a March 2020, bear market low at $12 to about $35 by the start of 2021; but from that point the stock soared, rising to its March high at around $102 per share. From that peak and the initial collapse I just described, the stock settled into a practical consolidation level that failed to withstand broader uncertainty around inflationary pressure in early November, and followed by the last couple of week’s worth of omicron variant-driven fears. The latest earnings report, however indicates that VIAC’s fundamental strength is still in place, which also means that its value proposition remains very, very attractive. That suggests that, even with the stock’s recent drop in price, VIAC may continue to represent one of the best values in the market right now.
Fundamental and Value Profile
ViacomCBS Inc., formerly CBS Corp, is a global media and entertainment company. The Company is focused on creating premium content and experiences for audiences worldwide. It operates through various brands, including CBS, Showtime Networks, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, CBS All Access, Pluto TV and Simon & Schuster, among others. It also offers production, distribution and advertising solutions for partners across five continents. BET is the primary channel of BET Networks, that provides entertainment, music, news and public affairs television programming for the African-American audience. CBS Sports brand is a broadcaster of television sports. Its Paramount Pictures brand is a producer and global distributor of filmed entertainment. Its CBS Television Studios is a supplier of programming with more than 70 series in production across broadcast and cable networks, streaming services and other platforms. Its brands also include Bellator MMA and COLORS. VIAC has a current market cap of about $20.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -16.5%, while revenue increased by 8%. In the last quarter, earnings were -21.65% lower, while revenues were flat, but positive by 0.7%. VIAC operates with a healthy operating profile that weakened in the last quarter; over the last twelve months, Net Income was 12% of Revenues, and that increased to 8% in the last quarter. The next quarter’s data will help determine if the declines I just described are transitory, cyclical questions or part of a larger, more worrisome trend.
Free Cash Flow: VIAC’s free cash flow is healthy, at $1.04 billion. This number declined from about $1.6 million in the last quarter, and $1.9 billion a year ago. The current number translates to a Free Cash Flow Yield of 5.18%.
Dividend: VIAC’s annual divided is $.96 per share, which translates to a yield of 3.09% at the stock’s current price.
Debt/Equity: VIAC carries a Debt/Equity ratio of .84, which is a significant drop from 1.23 at the beginning of 2021. Their balance sheet shows about $4.8 billion in cash and liquid assets versus $17.7 billion in long-term debt. Their operating profile suggest that the company should have no problem servicing their debt, with good flexibility and liquidity to go along with it.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target a little below $85 per share. That suggests that the stock remains massively undervalued, with about 175% upside (not a typo) from its current price. It should also be noted that just a couple of quarters ago, my analysis put the stock’s long-term target at around $102 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart looks at the last year of price activity for VIAC. The red diagonal line measures the length of the stock’s downward trend from its March high at around $102 to its most recent low, seen last week at around $29. It also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock held a strong consolidation between $42 and $38 until mid-October, before larger economic questions finally pushed the stock out of that range late that month. The stock’s slide picked up momentum in November, and finally appears to have found a new, low-point support at around $29. Immediate resistance appears to be around $35 based on previous, early November support in that range. A push above $35 should have upside to between $38 and $48, while a drop below $29 should find next at around $27 based on pivot activity in that range in October 2020.
Near-term Keys: While the stock has picked up bearish momentum in the last couple of weeks, it also looks to have found strong support in the $29 area, which means that if you prefer to focus on short-term trading strategies, a continued push off of support appears to have $4 to $5 of near-term upside, which is a pretty good opportunity to this about buying the stock or using call options. A drop below $29 could be a signal to consider shorting the stock or buying put options, with $27 offering a reasonable, quick-hit profit target. The stock’s value proposition continues to be compelling, and the stock’s recent increase in bearish momentum only emphasizes the stock’s bargain status even more; however I do think that some of the company’s fundamentals, including Net Income, Free Cash Flow, and cash and liquid assets have shown enough weakness to warrant a cautious eye. Looking for improvements in at least two, or even better, all three of these critical areas would provide a much stronger confirmation of the stock’s bargain proposition.