I certainly understand the appeal of Viacom (NASDAQ:VIA,VIAB) stock. Viacom B stock (which is much cheaper than the VIA Class A issue), the stock trades at just 6.5x 2019 consensus EPS. That still is probably too much to pay for Viacom stock.

The company owns well-known global brands like MTV, Nickelodeon and Paramount Pictures. And there’s still a reasonable likelihood that Shari Redstone, whose family controls both Viacom and CBS Corporation (NYSE:CBS), will merge the two companies.

Even without CBS, a likely consolidating media space means Viacom could be a buyout target of someone, at some point.

The problem is that I don’t particularly see the appeal of the Viacom business. The company does have well-known brands but they’re not performing particularly well. Both advertising and affiliate fee revenues are in declining. That’s topped with a heavily leveraged balance sheet.

For investors who believe that content will have value amid increasing consolidation, Viacom stock could be interesting. But I still think there are better plays on that thesis and still see real risk to Viacom stock if a buyout doesn’t occur.

Concerning Performance

Media stocks haven’t performed all that well over the past few years, as investors have focused on the threat of cord cutting. CBS stock is down more than 25% from 2015 peaks, as is AMC Networks (NASDAQ:AMCX).

Despite strong performance in its theme parks and movie businesses, Walt Disney (NYSE:DIS) stock has been pretty much range-bound amid concerns about its ESPN unit. Discovery Communications (NASDAQ:DISCA) is off about 40% since the beginning of 2014.

But even relative to those peers, Viacom stock has disappointed. It’s down by two-thirds from 2014 highs. The underperformance applies to the business as well. Subscriber declines are pressuring both advertising revenue and affiliate fees (payments to Viacom from cable operators like Comcast Corporation (NASDAQ:CMCSA) to carry its channels).

Revenue excluding acquisitions and foreign currency declined last fiscal year (ending September), and have done the same in the first half of fiscal 2018. Adjusted operating income fell 5% last year; it’s flat YTD, but only because the movie business didn’t lose money in Q2, as it did a year ago.

The core concern here is that it’s difficult to see that trend reversing. Viacom is aggressively cutting costs: it’s targeting $300 million in total savings, $100 million-plus of which will be realized this year. That’s not enough, however.

The flagship networks, BET, MTV, and Nickelodeon, are heading in the wrong direction. With audiences on the whole moving to services like Netflix (NASDAQ:NFLX), that trend most likely will not reverse.

The Buyout Case for Viacom Stock

That said, there is a chance that Viacom will be taken out. Redstone continues to favor a merger of her two controlled companies. That in turn has led to a protracted legal fight, with CBS management strictly opposed to a tie-up.

As a CBS shareholder, I’m not interested in owning Viacom, either. Unlike Viacom, CBS is thriving in the cord-cutting environment. But sexual harassment allegations against CBS head Les Moonves could give Redstone a leg up in her efforts.

And reported merger offers would drive some upside for both VIA and VIAB stock in a buyout. In fact, they’d drive much more upside in VIAB, given the odd and long-held spread between the two classes. VIA shares have voting rights; VIAB do not. But those voting rights are worth little, due to the control by the Redstone family.

If not CBS, perhaps another buyer would be interested. Content stocks rose across the board after the acquisition of Time Warner by AT&T (NYSE:T) was approved. With distributors now (apparently) able to buy content players, more deals like the T-TWX combination could be on the way.

And with relatively few assets out there, it would only take one buyer to send Viacom stock skyrocketing.

The Problem with the Buyout Case

The catch with the buyout thesis is the business, however. A Viacom acquisition would require a significant amount of patience, and an effort to turn the business around amid a declining cable and satellite subscriber base. The news is better overseas, admittedly, but the U.S. still accounts for over 70% of revenue here.

Meanwhile, other content stocks offer similar theses and similar valuations. I sold AMCX last month, but back at $60 it’s cheap (under 7x forward EPS) and a likely buyout target itself. DISCA trades at 7x+ earnings, with (slightly) better operating results. Local broadcaster Gray Television (NYSE:GTN) just made a big acquisition and remains reasonably cheap.

In fact, I’d argue that an investor who likes Viacom stock should simply buy CBS stock. The Moonves issue muddies the water a bit, but if CBS does merge with Viacom, that investor still winds up owning Viacom. And if it doesn’t, CBS most likely goes up, since the market has clearly voiced its displeasure with a merger.

And that latter fact alone is a big impediment toward getting too excited about Viacom. CBS shareholders, and the market as a whole, don’t think it’s a company worth buying. That makes the stock at best a hugely contrarian bet, and at worst, a potentially painful value trap.

As of this writing, Vince Martin is long shares of CBS Corporation. He has no positions in any other securities mentioned.