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ViacomCBS's Earnings Fail to Impress

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·4 min read
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ViacomCBS's disappointing earnings report for the fourth quarter of 2019 surprised many analysts, who now believe that the below-par results foretell a rather shaky future for the newly-merged business.

Factoring in the nearly $1 billion in merger-related costs and other expenditures, ViacomCBS posted 97 cents in adjusted earnings per share. That figure represents a 42% decrease from the $1.66 earnings per share for the same period last year. The consensus estimate on Wall Street was $1.41, prompting many to view the results as a negative sign.


Revenue decreased 3% from the same quarter last year to $6.9 billion. Analysts anticipated revenue of $7.3 billion for the quarter. It is interesting to note that a substantial amount of the year-over-year decrease stemmed from a $153 million revenue drop from content licensing fees.

Adding to its fourth quarter financial woes, ViacomCBS's Paramount studios logged a loss from its meager film offerings for the fourth quarter. To add insult to injury, the company's guidance for 2020 was lower than that which it had projected just months earlier. As a result of failing to meet expectations, many analysts adjusted their free cash flow and earnings per share predictions downwards.

In 2020, the company anticipates revenue of $28.9 billion to $29.5 billion, compared with $27.8 billion last year. Analysts project $29.7 billion in revenue. The company projects adjusted earnings per share of $5.15 to $5.50 in 2020, up slightly from $5.01 in 2019, while the Street estimates $6.02 for this year.

One difficulty for ViacomCBS is that it was late to the streaming game. Months before its merger, the digital streaming playing field was already starting to get crowed.

It's difficult to discern with certainty whether the below-average results indicate ViacomCBS's content offerings are insufficient to compete with existing or well-established streaming services, or whether, the lackluster results should be expected as the short-term price for ultimately achieving synergies that can be leveraged profitably by joining together.

CEO Bob Bakish attributed the fourth quarter results to anticipated merger pains, attendant to any consolidation of diverse media companies. Bakish characterized the most recently reported quarter as a "transitional one."

In some respects, ViacomCBS is in a similar position to AT&T (NYSE:T), which recently merged with Time Warner. Anxious AT&T investors wanted to see a quick conversion of the combined company's assets reflected in the bottom line. At the time, analyst expectations, whether reasonable or not, were heighted due to the post-merger increase in AT&T's debt load.

Not all investors are as pessimistic about the ViacomCBS fortunes. In a recent interview with Barron's, Mario Gabelli (Trades, Portfolio) expressed a slightly different view of the future earnings potential of the combined media entity. Unlike some analysts, who have focused on the company's free cash flow estimates for the short-term, Gabelli views the free cash flow projections favorably based on a five-year basis. Gabelli anticipates $6.5 billion in Ebitda for 2020 and $30 billion during the next five years. Since he believes capital spending at $200 million per year is somewhat negligible, he anticipates the company can generate net free cash flow of $14 billion for spending on new content for their other streaming properties.

Gabelli believes that the company's Paramount Studio's 3,600 movie titles, combined with the 2,140,000 TV episodes in its content library, makes it well positioned to compete in terms of offering a plethora of diverse content, eventually creating what he calls a "content juggernaut."

Valuation

Despite all the risks noted above, the stock may warrant a look from intelligent investors looking for bargains based on its current valuation relative to its other streaming competitors. One's perspective will depend on whether they subscribe to the company's asset mix or business plan for competing against existing streaming Goliaths, or whether the price for the content obtained won't create long-term value sufficient to justify the cost for combining the two companies.

ViacomCBS's shares are trading at $25.61 as of the writing of this article. The stock trades for less than five times projected 2020 earnings, a fraction of the S&P 500's current multiple and well below that of Disney.

Disclosure: I have no position in any of the securities referenced in this article.

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This article first appeared on GuruFocus.