ViacomCBS Pre-Earnings: Losing to Competitors?

ViacomCBS (VIAC) is a global media and entertainment company that was formed as the result of a merger between Viacom and CBS and operates in three segments: TV Entertainment, Cable Networks, and Filmed Entertainment.

The main value for VIAC comes from its CBS broadcast network, which offers viewers worldwide access to a vast collection of content. Additionally, the company benefits from ownership of one of the top four national news networks, with affiliate stations in 16 major media markets.

This incredible reach across the United States gives the company significant pricing power with advertisers as well as a large audience to whom it can broadcast its own content. It also possesses sports television broadcasting rights, which include the NFL and college basketball and football.

While its competitive positioning and massive viewer network are undeniable, the company does face headwinds from cord-cutting and increasing sports broadcasting from competitors like Amazon (AMZN). These headwinds are not making a major dent in revenue today, but over the long term will likely force earnings to stagnate and revenues to decline, as younger generations increasingly choose streaming and on-demand products over cable television. (See ViacomCBS stock chart on TipRanks)

Valuation Metrics

VIAC’s valuation looks reasonable at the moment, as the enterprise value to EBITDA ratio (8.8x) is slightly below the 10-year average (9x), as is the price to normalized earnings ratio (11x current, compared to the 12.4x 10-year average).

Furthermore, despite the aforementioned headwinds, VIAC is expected to effectively fully recover to pre-COVID-19 revenue levels this year with the full return of sports in the United States. In 2022, analysts expect VIAC revenue to grow at a modest 2.9% along with 3.2% net income growth. That said, the normalized earnings per share for both ’21 and ’22 are expected to remain well below ’19 levels, as profit margins have declined due to the company’s weakening competitive positioning. 

Wall Street’s Take

From Wall Street analysts, VIAC earns a Moderate Buy consensus rating based on five Buy ratings, three Hold ratings, and two Sell ratings in the past three months. Additionally, the average Viacom price target of $49.40 puts the upside potential at 28.6%.

Summary and Conclusions

VIAC possesses a massive audience network as well as a large media library and numerous outlets to stream its content. It also has one of the four major news networks as well as extensive sports TV broadcasting rights. As a result, it is certainly fair to say that the company possesses a moat. 

That said, investors should keep in mind that an increasing number of consumers are favoring cord-cutting and instead subscribing to services like Netflix (NFLX) for entertainment, while companies like Amazon are also increasingly entering the sports broadcasting space. 

While we do not expect to see VIAC revenues collapse anytime soon due to this new competition, we do see it as an irreversible long-term headwind and therefore expect that the company’s top-line growth will be muted in its core businesses.

The share price looks reasonably attractive here and Wall Street analysts are mostly bullish on the stock’s prospects, so it could make for a worthwhile buy. Still, investors should keep in mind the long-term headwinds facing the business.

Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.