It’s been 17 months since CBS (NYSE:VIAC) completed its $25-billion merger with Viacom. Since the merger was completed on Dec. 4, 2019, VIAC stock has basically gone sideways, but not without a lot of drama and volatility.
If you’re unfamiliar with the CBS/Viacom love-hate relationship that developed over the 13-year separation of the two companies, I won’t bore you with the details.
Suffice to say, Non-Executive Board Chair Shari Redstone, who is the daughter of the late billionaire Sumner Redstone, who controlled the company through his National Amusements holding company, pushed for this merger for several years.
In fact, most analysts felt it was necessary as well.
“This merger was born out of necessity,” said CREATV chairman Peter Csathy. “It is no mystery that scale is what everyone has been looking for in this fundamentally changing media space.”
And yet VIAC stock fell as low as $10.10 in the March 2020 correction before sprinting all the way to a 52-week high of $101.97 in March 2021, only to give over 60% of it back over the next weeks. As of May 12, it’s trading around $39.06, slightly up on the year.
On May 6, the company reported Q1 2021 results that were better than expected. Shareholders can thank its streaming service, Paramount+, for the overachievement.
Long-term, VIAC stock should be a winner. Here’s why.
VIAC Stock Lost 30% In March
Before I get into the positives, there are two reasons it lost 30% of its value in March.
First, the company announced a secondary offering on March 24 that would see it issue 20 million Class B shares of its stock along with 10 million of its Series A Mandatory Convertible Preferreds. While the $3 billion raised will be put toward Paramount+ and other corporate purposes, investors didn’t like the 5% dilution to its share count.
Secondly, due to a total meltdown at Archegos Capital Management, the asset manager was forced to sell huge blocks of VIAC stock in a fire sale. In four days of trading, ViacomCBS shares lost 50% of their value before stabilizing.
Needless to say, those two events brought VIAC back to square one after 17 months with nothing to show for its post-merger efforts. By comparison, the S&P 500 gained 3% over the same period.
The poor performance relative to the index surely has Redstone and the rest of the insiders at ViacomCBS itching for a bounceback.
Paramount+ appears to be its best bet.
Paramount+ Gaining Traction
ViacomCBS rebranded CBS All Access and relaunched it as Paramount+ on March 4. While it’s true that several competitors had more comprehensive launches in late 2019 and early 2020, well ahead of its own streaming service, late is better than never in this instance.
Personally, I’m seriously looking at dumping my cable company and limiting my viewing to a few streaming services such as Paramount+. I’ll use an internet-only provider for my broadband. While cost reduction is an interest, I’m more interested in seeing how much I can reduce my overall TV watching.
In the first quarter, ViacomCBS added six million streaming subscribers globally, bringing its total to 36 million. Thanks to Paramount+, the company’s streaming subscription revenue increased by 69% during the quarter.
Parrot Analytics recently reported that the Paramount+ content made up about 9% of the overall demand for streaming services in the U.S. so far in 2021. That puts it ahead of Apple’s (NASDAQ:AAPL) AppleTV+ (1%), Disney’s (NYSE:DIS) Disney+ (4%), and NBCUniversal’s Peacock (8%), but behind AT&T’s (NYSE:T) HBO Max (10%), Amazon’s (NASDAQ:AMZN) Prime Video (12%), Netflix (NASDAQ:NFLX) (20%), and Hulu (23%).
By the time Paramount+ really gains traction, ViacomCBS’s film revenue should be back to normal levels. So, at worst, Paramount+ will make up the difference until Covid-19 is a thing of the past.
“As movie theaters reopen, ViacomCBS should be able to return theatrical revenue to pre-pandemic levels, after falling to an immaterial amount during the quarter as theaters remained closed,” uk.Investing.com senior analyst Samuel Indyk told Observer. “With COVID-related production delays subsiding, TV and film production will resume full throttle and should provide a boon for licensing revenue growth in the months ahead.”
In 2021, ViacomCBS expects its spending on streaming content to double from 2020.
It was able to generate a quarterly profit of $1.52 a share in the first quarter, 30 cents ahead of the analyst estimates, which bodes well for the future.
The Bottom Line
ViacomCBS generated $1.59 billion in free cash flow (FCF) in the first quarter, up considerably from $306 million a year earlier. In the trailing 12 months, it had FCF of $3.3 billion, good for an FCF yield of 13.4%. I consider anything above 8% to be value territory.
Citi analyst Jason Bazinet recently upgraded VIAC stock to “buy” from “neutral,” suggesting that it was too cautious about its Paramount+ projections. He has a target price of $56, providing investors with plenty of upside.
When trading around $10 in March 2020, it was in deep, deep, value territory. Now, it’s just in value territory.
Paramount+ is the tonic for its ailing stock. Buy some at these levels and double down should it fall into the low $30s or high $20s.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.