The past few years have been good ones for most members of the media industry. Unfortunately, Viacom (NASDAQ:VIA,NASDAQ:VIAB) has totally missed out on the fun. Viacom stock peaked at more than $80 in 2014. Remarkably, it’s down to less than $30/share today. VIAB stock has put up truly horrific long-term performance; as long ago as the year 2000, Viacom stock traded for $40.
What’s led to Viacom’s string of shareholder value destruction over the past 20 years? There’s a long list of major problems. One is that the company has been plagued by drama and infighting. The Redstone family controls most of the company’s voting rights, and that power has led to great controversy. The company has been running through new CEOs and management arrangements, and is long-rumored to be merging again with CBS (NYSE:CBS).
Core Business Faces Disruption
Much of the management uncertainty is likely because the company’s business plan is being upended. For years, newer players, like Viacom, prospered by challenging the old broadcasting model with new more specialized niche channels. Viacom established dominance with certain demographics with its leading channels such as MTV, Nickelodeon, BET and Comedy Central. This led to both strong advertising rates on those channels and solid carriage fees from the cable providers.
This model has lost its appeal in recent years, however. Cord-cutting continues to erode Viacom’s core operations. In a world with increasing amounts of original content creation, Viacom risks getting lost in the shuffle. Viacom spends around $3 billion a year on content, which is certainly a formidable sum. But it pales in comparison to the likes of Netflix (NASDAQ:NFLX) and their reported $8 billion per year budget.
And a lot of content hasn’t aged so well either. MTV, in recent years, for example, has relied on reality programming that doesn’t resonate much in the streaming age. Certain Viacom channels like Nickolodeon are still dominating in their fields, but others are showing signs of aging.
When Will Viacom Pivot To Streaming?
Recently, Disney (NYSE:DIS) unveiled the details of their long-awaited streaming package. DIS stock jumped more than 20% in the days immediately following the announcement, and shares reached new all-time highs. Clearly, the market had been longing for Disney to make such a move.
Why isn’t Viacom following course? Arguably, on their own, Viacom doesn’t have enough compelling content to make their own streaming platform. They have some great programming to license to other platforms, but probably not enough for a standalone subscription that could get traction in such a crowded market. As such, it raises interest in a potential merger with CBS. CBS already has their CBS All Access platform. Combine that with Viacom’s shows, and you could start nearing critical mass for a Disney and Netflix competitor.
As it stands now, however, analysts are still forecasting that Viacom will continue to rely on its current revenue streams in coming years. As such, analysts have muted outlooks over the next five years — something like flat revenue growth — due to relying on the declining cable market for so much of the business’ profits. If VIAB stock manages to surprise with earnings this week, it’d likely be due to management offering more insight into the company’s digital strategy going forward.
VIAB Stock: Value or Value Trap?
It’s not difficult to make the case for Viacom as a value stock. After all, shares are down from $80 to $30 in recent years. Sure, the business has eroded in value over that time, but the move in the stock could be an overreaction. There’s also the matter that shares are trading at less than 7x forward earnings. You don’t need an awful lot to go right to make money when you buy a stock at that valuation.
Still, there are reasons for caution. For one thing, even getting to flat revenues would be an improvement. Viacom’s annual sales topped out at $15 billion in 2011 and have shown a declining trend since then, falling to less than $13 billion last year. A stable business at 7x earnings is usually a deal. A business that shrinks fairly significantly during a booming economy is another matter.
The company’s balance sheet still has a long ways to go as well. The company’s debt ballooned to $13 billion earlier this decade. They’ve paid down some of it, but more than $10 billion in debt remains. With the company generating around $1.5 billion in annual free cash flow, it indicates that Viacom would need to run for quite a few years to pay down its debt before getting back to a sounder fiscal position. With a potential merger with CBS or acquisition by a larger media company, however, this point may end up being moot.
Viacom Stock Verdict
Viacom stock doesn’t tend to make big moves on its earnings reports. Don’t expect that trend to change when VIAB reports earnings on Friday before the bell. The company has been putting in modest results for years now, so expectations are fairly low. Some things could move the needle for the company, such as international advertising picking back up or the filmed entertainment division returning to profitability.
That said, VIAB stock is clearly cheap because the market is full of uncertainty. It’s not clear what management is trying to accomplish, or what will eventually become of the long-running CBS/Viacom merger drama. Until some of those doubts are resolved, VIAB stock is likely to continue to trade at a low P/E ratio.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
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