Monday, May 17, 2021

Viacom

I recently purchased shares of media giant Viacom. They pretty much do everything from creating/licensing content to distributing it across cable and internet platforms. Rarely do I own shares in companies this large, because valuations tend to be high. But some market shenanigans have created an opportunity here, in my opinion.

Viacom was a major holding in the portfolio of hedge fund Archegos when it went bankrupt, causing its lenders to have to sell its shares. Shares of Viacom are down some 60% over the last two months following a speculative run-up. Management was smart enough to take advantage of the run-up: they issued $3 billion worth of shares at $85 per share, making the company more valuable than it was prior to the rise and fall.

Being a large-cap, there are already a lot of write-ups on this company so I won't go into too much detail about it. Instead, I'll focus on a couple of items that I consider important.

First up, valuation. Enterprise value is $40 billion while EBIT for 2020 was $4.5 billion. Considering Viacom's return on capital, this is already a very reasonable multiple. But factoring in what a difficult year 2020 was for the movie industry and for sports distribution (with many leagues/sports shutting down), 2020 earnings likely heavily understate the company's true earnings power. Revenue in the first quarter of 2021 was up 14% on 2020, and EBIT was up 34%. So the multiple is rather low for such a moaty company.

Cable channels are a bit of a melting ice cube, as viewers gradually cut the chord and switch to online viewing (i.e. OTT). Viacom will likely lose cable subscribers over time. But the other side of this are their streaming businesses, which grew to 36 million subscribers in Q1. Of course, Netflix is the dominant player here but what Viacom can offer is access to their existing sports/news programming, which differentiates it from a few OTT competitors.

Another big streaming opportunity is in international. American media is desired around the world, but capturing adequate economic value through local linear tv distribution is difficult for content producers. By getting direct access to the international customer though streaming products like Paramount+, Viacom is in a better position to capture value and gather data. This is a major priority for the company, as they anticipate being in 45 international markets by the end of 2022.

Overall, I think this is a large market mis-pricing. Viacom is cheap because of forced selling, and generates excellent returns on capital.

Disclosure: Author has a long position in shares of VIAC

2 comments:

Anonymous said...

Thanks, tested waters with call options for the first time with VIAC, got out with 30% in two days.
Not bad for a newbie.

Anonymous said...

Thanks, made 30% in two days. First time ever with call options.

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