Formerly Viacom Inc (VIAB). Merged with CBS Corp in 2020.
Asset Class: US Stock (Sector: Communication Services / Industry: Entertainment)
Original Investment Thesis (11/2017): Basically, my entire investment thesis in life is if you can own Spongebob Square Pants…do that! I remember one time when my tv provider was fighting with Viacom about pricing and they took their channels offline. My kids were pissed! When I tried to cut the cord around the house to save money and my kids heard the channels they would no longer have access to (Viacom channels) they were pissed. So, why not own the stock?!?! When it showed up on my screens a year ago, I was intrigued!
Current Thoughts (9/26/2019): Long term holding. Everybody is streaming! Everybody is getting in the content production game too. Companies like Netflix are spending fortunes (that they don’t have) to get/produce content. A few companies (like Disney) have tons of high-quality in-demand content. Others like Viacom have lots of content (with their top cable networks and one of the top tier movie studios) and expertise in making it already intact. They have 3.9 billion subscribers, making it the world’s largest entertainment company across TV. My guess is a media company with Viacom’s portfolio and expertise will be in high demand in the industry’s changing landscape. The merger (remerging) with CBS gives the overall company some additional scale and there are some really interesting synergies between the two. The other thing it does it get all the Redstone/Amusement Corp holdings under one rooftop and puts to bed many years of infighting and speculation. They also keep paying down debt and buying back shares. The only thing I’m not super thrilled about is that CBS has a good deal more debt than Viacom has. They have been doing share buybacks heavily in recent years. Their debt is falling rapidly but I’ve been excited to see Viacom put a huge dent in their debt and I’m not super excited about it increasing again with the merger (I guess). Regardless, Shari Redstone seems to have things rolling in the right direction to build (and/or unlock) some shareholder value. Plus…there is Spongebob Square Pants!
VIAB (Viacom Inc) – Annual Reassessment
I’ve owned this stock for over a year and just completed my annual reassessment on it. I was actually shocked at how well this company is doing right now and can’t see how it is trading as low as it is. I added to my position on Monday morning. I’ve attached a PDF that has my analysis in case anyone else might find it useful:
Basically, my entire investment thesis in life is if you can own Spongebob Square Pants…do that! I remember one time when my tv provider was fighting with Viacom about pricing and they took their channels offline. My kids were pissed! When I tried to cut the cord around the house to save money and my kids heard the channels involved, they would no longer have access to (Viacom channels) they were pissed. So, why not own the stock?!?! When it showed up in my screens a year ago, I was intrigued! My notes from my analysis when I bought this stock in November 2017 (@ $24.47):
- PRO #1 – From shareholder letter: “At a time of heightened competition in the television industry, Viacom remains the most-viewed family of cable networks. Its channels reach a cumulative 3.9 billion subscribers, making it the world’s largest entertainment company across TV.”
- PRO #2 – Viacom channels are nowhere on the cord-cutter world. They will have to figure that out…and when they do it should be a really good thing. I also think cord-cutting is overdone…won’t happen. Even if it does the content will still be valuable (and available on the ‘cord-cutted’ ‘networks’).
- PRO #3 – They are in the midst of a turnaround. Redstone’s wife won control. Fired old CEO last year. Stock has been hit further since then. Paramount also has a new CEO. The new strategy is to focus on the six core networks (Nickelodeon, Nick Jr., MTV, BET, Comedy Central, and Paramount). This side of the business is 79% of revenue. Will require investments for new content. But these channels should deliver content to Paramount, the smallest of the Big 6 studios, as well (21% of revenue). About 38% of FY 16 revenues were derived from ad sales, 36% from affiliate fees, 11% from feature films (theatrical and home video), 9% from TV licensing, and 6% from other ancillary sources (including merchandise licensing).
- CON #1 – Lost some synergies when spun off from CBS (split in 2006). Likely will remerge with them (will help on many fronts). I’m not sure I want to own both, however (we’ll see when the time comes).
- CON #2 – The Redstone/National Amusement Inc ownership structure is problematic. They own/control 80% of the voting shares (A shares). The family infighting seems to be resolved and the turnaround can go forward. I’d imagine that has been hamstringing the business for some time. That said B shares are still at the whim of the Redstone family (currently Sumner’s daughter, Shari).
- CON #3 – The super high debt to equity (205%) is my biggest concern with this investment. They are hyper-focused on it (last 2 pages of quarterly preso). So should improve substantially. $11B in LTD. Debt to Equity is 205%. Debt to Capital is 66%. Time Warner (a little over double their size at $30b rev) is 80% and 46% respectively. They have been buying back shares hand over fist with 51% of the share being repurchased over the last decade. TWX has repurchased 37% during that same time. Debt to Equity is down over the past few years (was $12.7b in 2014) and new management says they want to lower it further (announced in Feb 2017 plans to deleverage). Since then debt is down 15%.
So, I normally wouldn’t buy a stock at all with a debt level as high as this one (under any circumstance) but it has worked out so far. This is my highest debt to equity by far of any stock in my portfolio. They are down to $9.5 billion in debt and 128% debt to equity. Since the deleveraging program announced in Feb 2017, they’ve retired $3b in debt (with over $1b in 2018). It is still very high and a concern for me. Media companies generally have higher debt in general but not necessarily. I feel like they are getting their balance sheet cleaned up so they can (re)merge with CBS and complete other deals. These deals will be fairly key to their long-term survival (they believe…and I tend to agree). So, all in all, I am pleased with the direction of my largest concern with this asset.
This stock seems to be trading at pretty super-low valuations across the board (PE, CF, Sales, BV, etc). Most are trading at below the average low value and most are near all-time low valuations. The trading price for some of the ratios didn’t even get above the average low last year.
Another pro this year is the mention of cord-cutting and web presence. Last year there was basically no mention of this and this year it is a focus and it looks they are having very good success on this front. They actually just completed an acquisition to gain a video on demand service which should help them develop out this area. If wind up merging with CBS (and others) this should also wind up being positive on this front.
Schwab gives this an A rating, Morningstar gives it a 4-star rating with a narrow moat, and S&P gives it a 4-star rating. I don’t place a ton of weight on analyst but I do trust these reports more than most and generally view high rankings from them as good shows of support to all my other analysis.
I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72