Summary
- ViacomCBS is trading at 6 times earnings based on its most recent adjusted EPS on an annualized basis.
- Cord-cutting fears may be a reason for bearishness, but the company noted that its streaming revenues more than offset fees lost from lost cable TV subscriptions.
- The company shares long-term NCAA men's basketball tournament rights regardless of which viewing platform users will want to use in the future.
- The company has a library of over 20,000 episodes for its CBS All Access Service, which is currently a $9.99 per month add-on to Apple TV+.
- Investors may want to consider weighing bearish fears versus future streaming potential and current results.
On December 4, 2019, after years of operating as separate companies, Viacom and CBS completed a merger reuniting the companies under the name ViacomCBS Inc. (VIAC) ViacomCBS owns some of the most well-known names in entertainment content, including CBS, Paramount, Showtime, Simon & Schuster (which is reportedly for sale), Nickelodeon, and Comedy Central.
Year-to-date, as of the close on September 25, 2020, its Class B stock is down almost 30 percent. On August 6, 2020, the company reported adjusted earnings per share from continuing operations for the quarter ending June 30 of $1.25. On an annualized basis, that would be equivalent to $5.00 earnings per share, which would result in a price-to-earnings ratio of 6 based on last Friday’s closing price. Reported GAAP EPS was $0.77 which would translate to an annualized PE of under 10 based on last Friday’s closing price. The company also currently pays a quarterly dividend of $0.24, yielding 3.25 percent.
As the historical average P/E of the S&P 500 is often around 15, and the current trailing S&P 500 P/E ratio is around 36, if we assign a 15 P/E one might expect an average company with the capacity to earn five bucks a share to trade over $75 a share. Viacom’s most recent closing price of $29.53 is a fraction of that, suggesting possible market skepticism about the company’s future.
Some bearish reasons for this skepticism may include the ongoing impact of consumers cutting the cord; worries of too many streaming services; and concerns that the company is not large enough to compete with competitors with higher market capitalizations, such as Disney (DIS) or Netflix (NFLX).
However, for reasons I outline below, investors may want to consider whether the company’s library and sports rights may help it succeed despite these perceived obstacles.
Cord-Cutting May Be Bad For Cable Subscription Sellers But Great For Content Producers
The Wall Street Journal reported that in 2019 large American cable and satellite TV providers lost 5.5 million traditional pay-TV subscribers compared with 3.2 million in 2018. To put that in perspective, Variety reported in July that the total number of pay TV subscribers in the USA is about 83 million, down from a peak of 105 million subscribers in 2010.
Such a large decline might explain the large short interest in ViacomCBS of almost 102 million shares as at September 15, 2020. Perhaps short-sellers are assuming a continual decline in cable TV subscriptions, accelerated by a pandemic, may translate to poor results for companies like ViacomCBS. Specifically, shorts may be focusing on revenues earned from advertising on its channels along with revenues earned from fees for making its channels available to cable and satellite TV providers.
