ViacomCBS (NASDAQ:VIAC) now looks like a very good value play as VIAC stock is at a trough price and its earnings are trending well. Moreover, value players will be attracted to Viacom’s huge free cash flow (FCF) as seen in its latest Q3 earnings release on Nov. 4.
Cutting to the end chase here, ViacomCBS has produced $1.421 billion in FCF during the first 9 months of 2021. That can be seen on page 10 of the Q3 slide deck showing $1.652 in cash flow from operations minus $231 million in capex spending.
Free Cash Flow
It also represents an FCF margin of 6.9% on its 9-month sales of $20.581 billion. Given that analysts expect revenue of $28.03 billion this year, that implies that FCF could almost reach $2.o billion ($1.93b).
Most of the FCF has been used to repay debt — so far $2.22 billion so far this year. However, if this continues, I believe that the company could eventually consider increasing its dividend.
For example, so far this year, the 24 cents quarterly dividend has cost just $458 million. The dividend has been kept at 24 cents for the past five quarters. The annual cost of its 96 cents payment is just $621.5 million, well below the forecast FCF of $2.0 billion.
With higher levels of FCF and lower debt, ViacomCBS’s board might be willing to increase that dividend as it has done in the past. However, at Nov. 16’s dividend yield of 2.72% (i.e., 96 cents / $35.20 price as of Nov. 15), investors get good passive income.
Nevertheless, for the time being, this may take a back seat to the company’s stated desire to increase more spending on content. For example, in the last quarter, according to the earnings call, FCF worked out to $187 million.
Compared to Q3 revenue of $6.61 billion, the adjusted FCF margin was 2.8%, compared to 6.9% for the past 9 months. This is due to the higher spending on content (movies, TV shows and news) at ViacomCBS.
Where This Leaves ViacomCBS
Although Viacom’s total revenue rose just 13% year-over-year (YoY), its streaming revenue rose 62% YoY. However, streaming represents just $1.1 billion of its total $6.61 quarterly revenue.
Streaming includes roughly a little over half of its income from subscription revenue and slightly less than half from advertising. Its PlutoTV service is the advertising portion of the streaming service. This is known as an AVOD channel (advertising video on demand). Paramount+ is the subscription portion of its streaming revenue.
Given how fast both of these streaming divisions are growing ViacomCBS hopes to completely revamp its business model. It is transitioning its business model away from cable TV affiliate fees and cable TV advertising to streaming.
But streaming has just $1.1 billion in quarterly revenue vs. $1.855 billion in cable TV ads and $2.1 billion in cable TV affiliate fees. It could take several more years before streaming overtakes cable TV affiliates and cable TV advertising revenue.
As a result, until that happens the stock could continue to be cheap, especially if it keeps increasing spending on new content franchises.
What To Do With VIAC Stock
Given Viacom’s higher content spending, we can estimate that its FCF margin will be lower next year at about 3.0%. Given that the average of 26 analysts’ estimates is that revenue will hit $29.23 billion, this results in FCF estimates of $877 million.
Therefore, if we divide this FCF estimate by an FCF yield of 3.0%, the target market cap for ViacomCBS is $29.23 billion. That is now 27.5% higher than Viacom’s Nov. 15 $22.93 billion market cap.
As a result, VIAC stock is worth 27.5% more at $44.88 per share (i.e., 1.275 x $35.20 price as of Nov. 15). Given that the stock is down from its recent peak of $46.00 on June 28, this is not completely out impossible a goal for the stock to reach.
The only problem is there is no real catalyst at the present that might push VIAC stock to that point. Given that its FCF will be lower for the next year or so and the board might not raise the dividend, I suspect it may take a while for VIAC stock to rebound.
But that is why value investors like the stock, as it also allows them time to accumulate shares in this very valuable company. This could take several years while the company builds out its streaming revenue. But don’t forget that with its 2.7% dividend yield value contrarians get good passive income while they wait for its higher target value.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.