VIAC is a GOOD BUY ... Seeking Alpha article from today ...
Viacom's Worth Is Underrated
Jul. 02, 2021 1:22 AM ETViacomCBS Inc. (VIAC)11 Comments5 Likes
Summary
Viacom is a dividend powerhouse.
The company has added to its top-line prospects through the Pluto TV acquisition.
Normalized EPS indicates that the business cycle has been going through a trough.
Its dividend capacity is respectable with improvements in operating cash flow as well as net income.
There's a mixed consensus on Wall Street, but we think it's a buy.
CBS And Viacom Reach Deal for 12 Billion Dollar Merger
Drew Angerer/Getty Images News
Article Objective
The aim of this article is to identify the true value and assess the dividends of the stock. Viacom (NASDAQ:VIAC) is a popular stock among many but we'll convey through this article what needs to be considered when investing.
Viacom is the world's leading media and entertainment company. It operates through three segments TV entertainment, cable networks and film entertainment.
The stock has been touted by many as a dividend play or as a cyclical play. Let's get into it and see where it's at.
Performance
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Source: Portfolio Visualizer
If you're after capital gains, then Viacom is a pure cyclical play for you. The stock has over and underperformed the S&P 500 at various stages of the company's life cycle. When studying the correlation with the U.S. stock universe, there's not been a trend in correlation. It would be easy to conclude that we're in for a cyclical swing due to the stock lagging the market and by studying the correlation, but further analysis is required. Let's get into the value drivers.
Latest Value Drivers
The cable network unit continues to do well as Showtime has continued to gain traction. Both Showtime OTT Access and CBS All Access have gained significant traction. There has also been a resurgence in MTV, with the MTV music awards drawing 6.4 million viewers across its live simulcast and 41.1 million interactions across social media, making it the second most social show of the year.
Online video-on-demand services have also gained traction. BET has gained popularity within the African American communities. Comedy Central's South Side remains the world's highest-rated series premiere since 2012 among young adult African Americans.
Continuing, Nickelodeon is one of the most successful basic cable networks among children. In 2020 Viacom entered into a licensing agreement with local toy brand company Melissa & Doug to deliver PAW Control, Blue's Clues and You!
Viacom has strength in streaming services in both subscription and advertising. The recent acquisition of Pluto TV is a big value add as it offers access to over 250 live channels.
The quality of content allows ad revenue to flourish. Viacom reported a 62% year-over-year increase in ad revenue in its latest Q-1 report.
From a financial perspective, Viacom has solid balance sheet health with a Piotroski score of 7, which communicates to us that the balance sheet is more healthy than the industry average of 4.
Interest coverage of 4.7X accommodated by a 5-year revenue constant annual growth rate of 14.8% indicates that the company is scaling well in its top line, and efficiency isn't a problem as it's able to repay its debt comfortably.
Viacom beat its Q-1 revenue target by $135.27 million and its EPS target by $0.30.
Source: Gurufocus
Viacom has provided good value to shareholders of late as its diluted EPS has stabilized over the past decade. Rising net income and share repurchases have added to shareholder value.
Valuation
All of the base data used in our formulas throughout this section can be found on Seeking Alpha and Morningstar.
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We're going into a robust analysis of price multiples for a couple of reasons. First of all, we need to calculate the normalized P/E to identify business cycle impacts. Secondly, we need to see whether or not it has relative value.
Normalized P/E = Price/Normalized EPS = $45/4.64 = 9.70
We normalized the EPS by taking the 4-year average to account for changes in the business cycle. The current P/E exceeds the normalized P/E, indicating that an uptick in the business cycle could approach and the EPS could improve, subsequently improving the stock price.
Moving on to a relative valuation.
The P/E is currently under a 5-year average and well below the index. Based on the relative valuation of P/E, the stock is undervalued.
Taking a look at the price to sales and price to cash flow.
Based on the chart, the stock has good value in sales as the figure you ideally want to see as an investor is between 1 and 2. The price to sales is also lower than the 5-year average, which shows good value based on revenue.
The price to cash flow figure is really good. As an investor, any price to cash flow ratio of 15-20 is great to see; anything below that indicates value.
Dividends
Viacom has paid out 15 consecutive years and has a forward yield that is impressive.
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One common issue with dividends is usually that it erodes the capital for growth. In Viacom's case, that's extremely unlikely due to strong net income and cash flows.
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Viacom's dividend per share has also increased steadily over the past years. The latest dividend was in line with the previous quarters but an operating cash flow growth of 457.23% YoY might ensure hikes in the following quarters.
Risks
Revenues from theatre income are still uncertain. In a changing world, it's difficult to predict whether that particular business unit might have to be streamlined. The content streaming business is competitive with the rise of the likes of Netflix (NASDAQ:NFLX), Disney+ (NYSE:DIS), and Amazon (NASDAQ:AMZN). There's also been a large shift from cable TV to large telecom operators and low-cost over the top service providers. Viacom's stock has underperformed the market. Additionally, the consensus on Wall Street is mixed at the moment, with nobody seemingly agreeing on a close range of price targets.
