ViacomCBS (NASDAQ:VIAC) will report its Q1 2021 earnings on May 6. I expect to see a turnaround in free cash flow (FCF) from Q4, back when it was negative. This may propel VIAC stock higher from here.
Of course, owners of VIAC stock would certainly appreciate that. The stock has dropped like a rock in the last month. More specifically, this name had a peak close of $100.34 on Mar. 22. Today, on Apr. 29, the stock opened at $41.72. That’s a 58% drop in the last month.
A major reason for this precipitous drop was the fallout from the liquidation of Bill Hwang’s hedge fund, Archegos Capital Management. On Mar. 28, The Wall Street Journal reported that its banks were liquidating large blocks of VIAC stock along with Class A Discovery (NASDAQ:DISCA) shares. It appears that, as a result of this selling, the VIAC stock price was pushed down a great deal.
VIAC Stock: Free Cash Flow Forecast
Last year, ViacomCBS made $1.891 billion in free cash flow (FCF), according to the company’s earnings release. However, that included a large negative FCF result of -$453 million for Q4 2020. That implies that the FCF for the first 9 months of 2020 was $2.344 billion.
This is why I believe that the Q1 2021 results will show a huge turnaround in FCF. The same thing happened last year.
Back in Q1 2020, FCF was $305 million, a turnaround from Q4 2019 when it was at -$629 million. Fiscal year 2019 ended up with a positive FCF of $826 million, despite the hit during the fourth quarter.
So, this must be a seasonal thing about negative FCF during Q4. In fact, looking at the numbers for Q4 2020 even more closely, it included a total of $388 million in one-time losses on sales of assets. That would have come close to covering most of the -$453 million in FCF during Q4 2020. This is another reason why I believe that Q1 will show a major turnaround in free cash flow.
What ViacomCBS is Worth
Last year, the company’s $1.891 billion in FCF represented a 7.47% FCF margin on the $25.285 billion in sales that year. In 2021, analysts surveyed by Yahoo! Finance foresee $27.76 billion in sales. Therefore, using a 7.5% margin, FCF should hit $2.08 billion.
This represents an FCF yield of 7.99% on its market capitalization of $26.03 billion (i.e., $2.082 billion divided by $26.03 billion). However, today ViacomCBS has a lower, more valuable FCF yield. For example, its $1.891 billion in FCF represents 7.26% of its $26.03 billion market cap. This implies that the 2021 target value should be $28.68 billion, or 9.91% higher than today’s market cap.
Moreover, since the market always looks ahead for more than one year, we can do the same analysis based on 2022 forecast sales. Analysts estimate sales will hit $28.56 billion in 2022. Let’s assume FCF margins rise a bit to 8%. That implies that FCF will be $2.285 billion (i.e., 0.08 times $28.56 billion).
As a result, the 2022 FCF estimate, using a 7.26% FCF yield, implies a target market value of $31.47 billion. This is 20.6% higher than today’s market cap.
In other words, sometime in the next year, VIAC stock should be worth 20.6% higher than its price of $41.10 as of this writing, or $49.57.
What to Do with VIAC Stock
I am not the only one who believes VIAC stock is undervalued. For example, Tipranks indicates that 21 analysts have written up a recommendation in the last three months. Their average target price is well above mine at $57.89. That’s about 41% above today’s price.
The same is true at Yahoo! Finance, where 25 analysts give it an average target of $53.72. Similarly, Marketbeat.com indicates that 24 analysts have a consensus target of $47.04. That’s a more modest 14.45% above today’s price.
The average of all three of these analyst consensus prices is $52.88 — slightly higher than my price target over the next year. My target would likely rise as well if I used a higher FCF margin assumption and a lower FCF yield target metric.
In either case, expect to gain at least 21% over the next year by buying VIAC stock.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article.