If you’re old enough to remember when MTV started — or old enough to remember when it only played music videos — than you’re no spring chicken anymore. MTV is just one of many historic brands owned by ViacomCBS (NASDAQ:VIAC). Other iconic entertainment brands in the VIAC stock portfolio include Paramount, CBS, Comedy Central, BET, Nickelodeon, Showtime and many others. ViacomCBS has a library with approximately 140,000 television episodes and 3,600 films covering multiple genres such as comedy, sports, news, kids and feature films.
ViacomCBS has a diverse array of revenue sources, including advertising, affiliate fees (paid from cable companies to networks), streaming (both subscription and advertising) and licensing. Advertising is typically the largest and highest-margin of these sources.
Established media companies are generally high-margin businesses that generate significant free cash flow. ViacomCBS’ free cash flow yields over the past three years have been strong. However, media companies that own a large collection of cable channels often struggle to find growth due to cord cutting trends with the advent of streaming.
The VIAC Stock Valuation Isn’t Expensive
VIAC stock currently trades at about 10x 2021 consensus EPS and 8x EBITDA which is a bargain in todays crazy market. The WarnerMedia / Discovery transaction was valued at between 10x-11x EBITDA.
Stand-alone media companies such as VIAC and Lions Gate (NYSE:LGF-A) are expected to be acquisition targets by bigger media companies at some point. VIAC make a particular attractive target as it’s leverage ratio of 2.5-3.0x is lower than many in the industry. The company’s liquidity position is also strong with $5.5 billion of cash on the balance sheet and $3.5 billion in an undrawn credit facility. With that type of liquidity, maybe VIAC will be the acquirer instead of the other way around.
Potential acquirers of ViacomCBS include traditional media companies, but also include the FANG streamers such as Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Apple (NASDAQ:AAPL). Those companies need a lot of content to keep their subscribers interested. The attention span of most Americans is not very long anymore.
However the company is a controlled company. Shari Redstone controls 77% of voting rights through super-voting shares despite just owning a 10% economic interest.
Streaming Success
During the first quarter of 2021, VIAC put up some impressive streaming growth, with 69% growth in subscription revenues and 62% in advertising growth (related to streaming platforms). The primary streaming platforms for the company are Paramount+, Showtime, and Pluto TV. Total streaming subscribers at the end of Q1 were 36 million.
Conclusion
It’s possible the WarnerMedia/Discovery merger will trigger another round of global media consolidation. ViacomCBS has some of the best media assets in the industry and would add great scale and content to an acquirer. It’s unlikely the company would be acquired at prices seen during the meme/short-selling craze in March of this year where the shares topped $100. But a fair value in the $50’s or $60’s is not unreasonable.
In the meantime, VIAC stock pays a 2.1% dividend yield while we wait for something good happen.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.