Description

Summary long thesis on VIAC:

• The VIA/CBS merger was good for VIA and bad for CBS (as we thought in our VIA short write up from 2018) since it diluted CBS’ relatively strong businesses (CBS/Showtime) with VIA’s relatively weak ones (MTV, VH1, Nick, BET)
• The overall deal and subsequent performance was mediocre with some internal issues and COVID impact, but it did create some scale with the ability to create some chance of success in streaming (Paramount+, Pluto)
• This is one of the potentially credible reasons why VIAC should get a higher multiple today than VIA or CBS did in the past
• While 2020 was not great for the business, there is a chance that 2021/2022 are a decent bit better as cyclical advertising rebounds
• While the stock did go up over 100% on levered buying by the likes of Archegos, it is undeniable that it has gone down due to massive and price-insensitive selling by banks while there has been some undeniable positive events (the equity issue at a price double the current price, the Streaming update) --> this is really our thesis
• Valuation and the analyst community
• The analyst community is torn on VIAC with 6 buys (target prices as high as 80-120) and 11 sells (with target prices as low as 23 from Bernstein)
• The VIC community represents this:  there has been a long-time bull-bear debate on VIA on the site with 4 long write-ups and 3 short write-ups (we wrote one of the 3 shorts)
• Disagreements on valuation methodology (P/E vs. EBITDA vs. streaming SOTP), multiple (7x earnings to 20x earnings) and metrics (2022 EPS ranges from $4.85 to $3.44)
• We have seen this before in several instances (such brick and mortar retailers like MIK) and, in my view, VIAC is valued closer to the bear-case side of the spectrum and that side of the spectrum shows signs of intellectual dishonesty / thesis-fatigue
• Bernstein kept their $23 price target on VIAC even AFTER VIAC issued $3 billion of stock + units at $85: if you think that the stock is worth $23, then issuing stock at $85 should have created $63 per share in value * 32 million shares issued = $2 billion in value / 670 shares = you should raise your target price by $3 or 13% if you are being honest
• Bernstein has kept a $20-something target price on VIAC for years, all the while saying that EPS will go to $3 and deserves a 7-8x multiple
• This seems wrong because VIAC is larger, more diversified and less levered than VIAB was . . . and EPS is $4 and maybe higher
• Similarly, the bear thesis on VIC for VIAC has been a 6x multiple on $3 in EPS because it was 3+ turns levered and faced secular challenges
• Today:  levered is down to 2.5x with the equity issuance and Simon & Schuster sale, EPS is north of $4 and what business trades at 6x today, irrespective of its challenges, coming out of COVID into a cyclical boom for the next several quarters? 

Conclusion:  I think VIAC has no business being a 20x P/E stock right now, but I think the forced liquidation by banks, opportunistic capital raise, sale of Simon & Schuster and strategic initiatives/disclosure on streaming makes it an attractive investment to the mid 50’s or 60’s short term and maybe higher long term. 

There has been enormous discussion about traditional linear media, streaming economics, Viacom’s networks, Paramount, management, Shari/Sumner Redstone on historical VIC comments/ideas, so happy to discuss those and other specific details (Hulu deal, NFL rights step-up, Netflix licensing, Oprah Meghan Markle interview, March Madness, etc) in the comments section, but the bulk of the thesis is that ViacomCBS is stronger today than it was in the past, they took advantage of the crazy run-up in their stock, their stock is not expensive, it has a legit chance for a valuation re-rating and the analyst community is (perhaps stubbornly) bearish. 

VIA / CBS Merger: Overall disappointing, but larger, stronger and a chance for success in streaming

Actual 2020A EBITDA only $5.1 billion impacted by COVID

However Streaming Subs gaining some scale

 Massive and price-insensitive selling by banks – even more reckless and price-sensitive than on the way up

Valuation Confusion / Anchoring on Both Sides – Bull point to $100 price, Bears to 6x P/E historical multiple for VIA

Bernstein had a $29 price target in 2017 with under $4 in EPS for a smaller, weaker, more levered VIA and uses the same valuation for a larger, stronger, less levered VIAC – with no valuation for equity issuance

Summary Financials

Disclaimer:  I or my firm’s clients may have a position (long or short) in the securities discussed herein and may change such position without further notice.  This is not a recommendation to buy or sell any security

Catalyst

* End of forced liquidation of Archegos shares by prime brokers under margin calls

* Continued growth of streaming subs, rebound in advertising

* Conversion of bearish analysts to use higher P/E multiples or SOTP methodology

* More capital allocation like issuing stock at $85 and less like the prior 20 years of Viacom/CBS management