VIAC Stock Forecast: Is Show Time Over?

Sergey Okun  This VIAC Stock Forecast article was written by Sergey Okun – Financial Analyst intern I Know First.

Highlights:

  • Since the announcement of a new public offering on March 24th, 2021 VIAC stock dropped by 49%
  • Solidly profitable business with strong dividend history (ROE is 17% and 3-year dividend growth rate is 10.1 that better than 86% and 75% companies in the Media industry)
  • DCF support over 36% upside for VIAC stock for the coming year
(Source: wikimedia.org)

Overview

ViacomCBS Inc. is a global media and entertainment company that creates premium content and experiences for audiences worldwide. The company operates primarily in the U.S., Europe, Latin America, and Asia. There are three main segments of the company business: TV Entertainment (40% of revenue in 2020), Cable Networks (50% revenue in 2020), and Filmed Entertainment (10% of revenue in 2020). On December 4th, 2019, Viacom Inc. merged with and into CBS Corporation. At the effective time of the Merger, the name was changed to ViacomCBS Inc. There are two classes of common stock, Class A common stock (ticker “VIACA”) and class B common stock (ticker “VIAC”), both of which are listed on The Nasdaq Stock Market LLC. Owners of Class A common stock are entitled to one vote per share. Class B Common Stock does not have voting rights. As of December 31st, 2020, National Amusements, Inc. (“NAI”) directly or indirectly owned approximately 79.4% of voting Class A Common Stock. On March 30th, 2021 VIAC and VIACA stocks are $46.61 and $49.33 respectively. ViacomCBS is based in New York, United States.

The Track from White Swan to Ugly Duck

(Source: wikimedia.org)

When COVID-19 was introduced in 2020 it had a tremendous negative impact on the stock market. The S&P 500 dropped by 51% from February 20th, 2020 to March 23th, 2020. Afterward, the S&P 500 has started to grow up and  VIAC had a special place in this growth.

(Figure 1 – Growth rate to March 30th, 2021 at a basis point on April 1nd, 2020)

Has something changed during the previous week? According to Yahoo Finance, on the 24th of March ViacomCBS announced the second offering of class B common stock in the amount of 20 million shares at $85 per share (discount around 6.8% to the close price on March 23th) and the preferred stock offering in the amount of 10 million shares at $100 per share. The preferred stocks should be payable on a cumulative basis at an annual rate of 5.75% of the liquidation preference of $100 per share and get listed on the Nasdaq under the symbol “VIACP”. The net proceeds from the common stock offering and the preferred stock offering should be $1.67 billion and $983.1 million, respectively. The main purpose is to finance general corporate purposes, including investment in streaming. After this announcement the price dropped by 23% during one trading day on March 24th, currently, the price dropped by 49% for the period March 23th – March 30th.

The impulse for such a stock price drop is that several analysts downgraded the investment rating of the company. According to The Motley Fool: “Investors are starting to contemplate how much the company should be worth as it spends money to build a streaming business and yet falls behind rivals in the number of subscribers it has. Right now, the risk seems to outweigh the reward”. Afterward that the price went to free fall when the investment firm Archegos Capital Management faced a margin call and was forced to close positions for $20 billion worth of shares.

The current price dynamic of VIAC can be interpreted as a return to its historical average price ratio numbers. However, today’s values of VIAC price ratios are not the highest.

(Figure 2 – VIAC’s price ratios)

Has Music Stopped or Party Will Continue?

(Source: pixabay.com)

I suppose today we have an example of information asymmetry with VIAC stock when the market evaluates an idea of stock offering as management tries to use knowledge about the stock’s true value and getting additional money from the market. By these public offerings, the company wants to accumulate an additional $2.65 billion, while the company has $2.98 billion in cash on December 31st, 2020, and an available credit line for $3.5 billion.

Despite that ViacomCBS has assets to cover its financial needs and do it without additional public stock offerings, the current company’s financial situation can be characterized as restricted.

(Figure 3 – Comparison of VIAC’s debt ratios within the Media-Diversified Industry)

At the same time, ViacomCBS is one of the most profitable companies in the media industry with strong dividend history. ViacomCBS pays a quarterly dividend of $0.24 per share.

(Figure 4 – Comparison of VIAC’s profitability ratios within the Media-Diversified Industry)

ViacomCBS is also a well-diversified media company that has a sustainable stream of revenue even in the pandemic time.

(Figure 5 – Revenue Structure)

Due to COVID-19, significant growth of revenue from streaming by 49.4% in 2020 allowed to absorb revenue drop in other types of the company business. Despite that, streaming revenue had only 10.1% in the total revenue in 2020 and additional company investment in this type of company business can be characterized as further diversification which takes into account changes in consumer behavior. On the previous week, ViacomCBS announced a multi-platform agreement for exclusive U.S. rights to the Serie A Championship, the Coppa Italia, and the Supercoppa Italiana. ViacomCBS’ subscription streaming service, Paramount+, would deliver over 400 club matches live each season through 2024.

Today, the main driver that can have a significant impact on the stock price is the return from advertising which is expected to grow as the global economy recovers from COVID-19. For 2020, the 12% decrease in advertising revenues was driven by the adverse effects of COVID-19, including lower demand in the advertising market and the cancellation of NCAA Tournament as well as the comparison against CBS’ broadcasts in 2019 of the annual tentpole sporting events that the company has the rights to broadcast on a rotational basis with other networks. In 2021, the advertising revenue comparison will benefit from the broadcasts of Super Bowl LV and NCAA Tournament. Under the current contract with NFL, Super Bowl will be broadcasted on CBS Television Network on a rotating basis with other networks through the 2022 season, with CBS broadcasting these games in 2019 and 2021. Under the agreements with NCAA and Turner, the national semifinals and championship games of NCAA Tournament will be broadcasted on CBS every other year through 2032, including in 2019 and 2021, and in each year the games in the preceding rounds of the tournament are shared equally between CBS and Turner.

DCF Estimates $63 Target as VIAC Stock Forecast

The DCF analysis shows that VIAC’s target stock price should be around $63. This expected share price makes some 36% upside from the price on March 30th. The below forecast is based on average data from previous years, the direction of the company’s policy, and macroeconomic expectation in the entertainment and media industry (CAGR is 2.8%).

(Figure 6 – DCF Model of VIAC’s stock)

The following assumptions and estimations for DCF were used:

  • revenue’s CAGR is 2.8% for the period 2021-2025
  • the effective tax rate is 23%
  • market Beta is 1.9, the coefficient of regression (Beta) was calculated by five years monthly logarithm return and adjusted by a capital structure as a consequence of new public offerings
  • the risk-free rate and risk premium are equal to 1.96% and 5.6%, respectively

COVID-19 has had a structural impact on the market risk profile between financial assets, which can have a positive or negative effect on WACC.

(Figure 7 –  The Dynamic of Market Beta with the Frame of 5 Years)

The high beta value means that an investor asks for more return from investments in VIAC that has a reflection on the cost of equity and WACC. It is reasonable to expect that in the future when the story with COVID-19 will be over, the beta coefficient will decrease that will drop WACC, having a positive effect on the company value. I made a sensitivity analysis of VIAC based on WACC (in brackets are written the value of Market Beta) and growth:

(Figure 8 – Sensitivity Analysis of VIAC’s stock)

Conclusion

I take a buy-side on VIAC stock because the stock holds a positive DCF forecast resulting in a $63 target price, i.e. around 36% upside potential. There is a diversified media business that can generate sustainable cash flow even in the pandemic time. Advertising is a key component of the company revenue that is expected to increase in the coming years.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the VIAC stock forecast. The light red and light green for the short-term forecasts are mildly bearish and bullish respectively, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with VIAC Stock Forecast

I Know First has been bullish on the VIAC stock forecast in the past. On December 23rd, 2020 and March 5th, 2021 the I Know First algorithm issued forecasts for VIAC stock price and recommended VIAC as one of the best consumer stocks to buy. The AI-driven VIAC stock prediction was successful on a 3-month and 14-day time horizons resulting in more than 161.54% and 35.43% respectively.

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Please note-for trading decisions use the most recent forecast.