VIAB - Viacom

[Guest JoelS]

Too many dots were joining up - 

 

owned by BRK (Ted I believe)

Shows up on magic formula screener

bought back 17% of stock last year. 7bn remaining in 20bn stock repurchase program.

Sumner Redstone

shares have pulled back, down 8% on the year

 

What am i missing?

 

[Picasso]

I think a lot of these content stocks are very cheap.  I was going to start up a thread on CBS.

 

The thing that worries me (in the case with CBS) is they buyback a ton of stock when the stock is at some kind of peak.  I need to look further into VIAB to see their history of capital allocation over full market cycles.

 

Edit:  Over the past 10 years VIAB repurchased a ton of shares at an average price of $48.  They seem to have been grouped up when the valuation on the stock was the most expensive.

[Guest JoelS]

Thank you for looking into the share repurchases. I agree that CBS is also an interesting investment candidate. If you do start a thread on CBS, I will be an eager follower. 

 

Media companies are losing pricing power for their content, and Viacom is no exception.. but at some point the content companies will have to respond to the merging distribution companies. So the playing field will be very active on both the distribution side and the content side. It looks like distributors will continue to be first to gain scale however, and in this environment, the sustainable free cash flow of content co's may be illusory, to some degree. I wonder if there is a good parallel in the 80's or 90's to this situation, and what happened there.

 

Media is a really good industry overall, and I think one could do quite well just to focus on this area. According to EY, Media is projected to have aggregate profitability of 28% for full year 2014, which beats out most indices.

[Picasso]

I like the combination of valuation, capital allocation through buybacks, and tailwinds behind the media stocks. 

 

ValueAct took a pretty large stake in FOXA which seems to have received minimal attention.  I started looking at the whole sector after that TWX/FOXA drama and am spending time understanding several of these media stocks.  I am not sure whether it makes sense to pick the best/cheapest or to just simply group them together in a basket and spend less time understanding the minutia of each company so I can focus on other interesting opportunities.

 

The thing that worries me about the sector is the high-beta/leveraged nature of the stocks.  When volatility is low, they buyback a ton of stock.  When volatility picks up and the stock price declines, the leverage amplifies this a bit and they shut off the buybacks.  This is a sort of double edged sword since the stock loses a large buyer that existed during times of low volatility.  They have to be more careful with the capital allocation during volatile times because of the leverage so they aren't really able to take advantage of the price decline.  Even John Malone was margin called during 2008.

 

So given that the stocks should trade more cheaply than the market.  The average returns from the buybacks have been quite muted and I think it has a lot of do with the inability to really take advantage of a volatile stock.  The average buyback price at CBS was also around $45.

 

So what I would like to figure out is how long do these guys sustain or grow cash flows, because if their cycle lasts longer than the market thinks then you have a lot of buyback power and the potential to increase leverage to either do deals, consolidate and increase capital returns to shareholders while the valuations are still attractive.

[LowIQinvestor]

I think you are on the right track and looking in the right places!

 

VIAB will be a $100 stock in a couple years.

 

2016 they can do $7 in EPS

Apply a 15 PE.

 

[prevalou]

The  problems i see

 

-viacom increases its prices every year while there is no growth in volume,

-with cord cutting , the risk is that price increases are not sustainable

-viacom purchases its stock hand over fist while its profit margin is at the top thanks to price increases

 

Question: is this balance sheet leveraging opportune ?

 

 

 

[Picasso]

I am not sure this should be trading at 15x with higher EPS in a few years.  They are simply increasing the leverage in a cyclical business which is not something I would pay 15x for.  It is more likely they increase the leverage and this ends up trading for 10x as EPS increases from buybacks. 

 

But if the stock is at 10x in the future and they keep buying stock and the cash flow is still coming in, then yeah you'll make money in the stock regardless.  It seems like double counting to still want 15x earnings when the juice has already come in the increase in EPS from a reduction in the "S."

[LowIQinvestor]

Just curious, why do you view Viacom as a cyclical business?

 

Friendly wager that VIAB hits $100 in 3 years?

[LowIQinvestor]

Someone from Gabelli & Co. just said on CNBC that Viacom is a undervalued here and it will be owned by another company ultimately.

 

Trying to think who could buy them ( Comcast, Liberty, ?)

 

 

[Picasso]

They generate about 33% of their revenue from advertising which I view as cyclical.  Stock went from $40 to $13 in 2008 which I would view as cyclical given the market reaction.  68% declines do not happen to non-cyclical stocks unless there are leverage worries.

 

The stock was just at $90, could it get to $100 in a few years with $8 bucks of EPS at 13x earnings?  Sure why not.  That's an 11% CAGR or so which is nice in this environment but doesnt quite catch my interest.

 

Gabelli has been touting Viacom for a while.  The stock went up 64% in 2013 alone.  Granted the current valuation is still attractive but the average multiple on VIAB has been 15x and it trades for 14x.  Debt is 3x EBITDA versus an average of 2.4x.  It just seems fairly valued to me at 14x with a higher debt load.

 

But that said I think $100 in a few years is a reasonable target.  I politefully decline your bet  ;D

[LowIQinvestor]

I bet they are buying back shares today! A great price at 13x earnings.

 

"As of August 5, 2014, Viacom had $7.15 billion remaining in its $20

billion stock repurchase program. "

 

 

[Guest JoelS]

Interesting tidbit..

 

 

"Speaking to FierceCable, Suddenlink spokesperson Pete Abel dismissed any notion that his company entered negotiations with Viacom intending all along to drop its channels. But there had been research conducted to support the decision.

 

"We listened to the voice of our customers, as expressed through calls to our care centers, surveys, and polls," he said. "The consensus was clear: Customers did not value the Viacom channels as much as they valued other channels. They did not want to pay significantly more to keep the Viacom channels. And there were a number of other channels they would like to see added. We were guided accordingly."

 

[morningstar]

Viacom's in a tough spot. Starz would be a nice fit for them if the price isnt too crazy ... would help them a ton with the MVPDs and would let them gracefully escape from the nightmare of Epix...

[loganc]

Viacom's in a tough spot. Starz would be a nice fit for them if the price isnt too crazy ... would help them a ton with the MVPDs and would let them gracefully escape from the nightmare of Epix...

 

I don't mean to pick on you specifically, but why is Viacom in such a tough spot?  It seems that this "fact" is taken for granted at this point - perhaps helped by the recent stock price performance?. 

 

Clearly, the recent news about the Suddenlink negotiations is not exactly positive.  Also, the movie studio results bounce around a fair amount and create noise, but the "core" networks business seems to me to be a pretty good business.  On top of it, you get what is in all likelihood very good management and a pretty defined capital allocation plan.

 

I would like to hear some clear elucidation as to why this business is truly impaired. 

 

   

[LowIQinvestor]

"Viacom is trading at an 11.3x F2015 P/E, an 8.5x EBITDA ratio, and a 9.6 percent free cash flow yield. Viacom shares are now down 18.0 percent ytd vs. the S&P 500 up 2.1 percent."

 

 

[dwy000]

Big drop today on no news.  Back down below $70.  Very, very tempting at these prices - but I'd love to know what caused it to fall off the cliff today.

[dwy000]

Ask a dumb question.....

 

Discovery Networks came out with results which were disappointing...and Dish Network saw subscriber losses.  Both would suggest outlook for VIAB is negative.

[cayale]

Big drop today on no news.  Back down below $70.  Very, very tempting at these prices - but I'd love to know what caused it to fall off the cliff today.

 

On the DISCA call, CEO basically said the ad market was soft; less upfront buying, a lot of available inventory and perhaps a softening of spot prices.

[LowIQinvestor]

If Viacom got a similar PE multiple to Discovery or CBS, the stock would be at least $88 a share.

 

25% upside.

 

This space is due for consolidation.

 

Anybody have this report?: "Put CBS and Viacom Back Together, Gabelli analyst says"

http://blogs.wsj.com/moneybeat/2014/10/27/put-cbs-and-viacom-back-together-gabelli-analyst-says/?mod=yahoo_hs

 

[LowIQinvestor]

Earnings out:

http://files.shareholder.com/downloads/VIA-B/3630101506x0x794305/9f2f5ebd-657b-4e1e-be8b-28546df3a22a/Viacom_Q4_14_Earnings.pdf

 

VIACOM REPORTS RECORD PROFIT FOR FISCAL 2014

• Full-Year Adjusted Operating Income Rose 5% to Record $4.13 Billion and Full-Year

Adjusted Diluted EPS Increased 15% to Record $5.40

• $3.9 Billion Returned to Shareholders in Fiscal 2014 Through Share Repurchases and

Dividends

• Fourth Quarter 2014 Revenues Up 9%, Driven by Strong Affiliate Fees and

Theatrical Revenues

• Adjusted Diluted EPS Increased 10% in the Quarter to $1.71; Adjusted Net Earnings

Totaled $729 Million

 

 

 

[LowIQinvestor]

10-K is out:

http://files.shareholder.com/downloads/VIA-B/3630101506x0xS1339947-14-50/1339947/filing.pdf

 

Definitely a serial cannibal:

610 M shares outstanding in 2010

414 M shares outstanding.today

 

 

 

[LowIQinvestor]

Time Warner CEO Teases Idea of CBS, Viacom Tie-Ups

'I Know Something About It, but I Don't Want to Talk About It'

 

http://adage.com/article/media/time-warner-ceo-teases-idea-cbs-viacom-tie-ups/296192/

[Phaceliacapital]

Thank you for looking into the share repurchases. I agree that CBS is also an interesting investment candidate. If you do start a thread on CBS, I will be an eager follower. 

 

Media companies are losing pricing power for their content, and Viacom is no exception.. but at some point the content companies will have to respond to the merging distribution companies. So the playing field will be very active on both the distribution side and the content side. It looks like distributors will continue to be first to gain scale however, and in this environment, the sustainable free cash flow of content co's may be illusory, to some degree. I wonder if there is a good parallel in the 80's or 90's to this situation, and what happened there.

 

Media is a really good industry overall, and I think one could do quite well just to focus on this area. According to EY, Media is projected to have aggregate profitability of 28% for full year 2014, which beats out most indices.

 

Hence the Fox/Time Warner proposal (although I think Rupert mostly wanted HBO). That being said, consolidation on the right side is not the best of news, but it puts the emphasis again on having strong content (and imo, mainly news and sports) where Fox & TW outshine their peers.

 

To be honest, I don't get why CBS was spun from Viacom in the first place. It's funny that articles concerning the event (I was still in highschool playing videogames at that time) mention that "Last June, Viacom VIA disclosed plans to divide the assets to allow investors to track its faster-growing movie and advertising-supported cable units from the slower-growth broadcasting and publishing operations.".

 

Given the share price and business performance of the two, I would much rather have "tracked" the slower CBS activities..

 

I am staying away from Viacom for several reasons. a. Content does not seem that strong, b. large dependency on advertising revenues. Which if you combine it with a. is even worse because if cable operators are dropping your content, you're going to have a hell of a hard time of convincing ad agencies to spend their precious dollars with your "strong" content.

 

 

[RadMan24]

Thank you for looking into the share repurchases. I agree that CBS is also an interesting investment candidate. If you do start a thread on CBS, I will be an eager follower. 

 

Media companies are losing pricing power for their content, and Viacom is no exception.. but at some point the content companies will have to respond to the merging distribution companies. So the playing field will be very active on both the distribution side and the content side. It looks like distributors will continue to be first to gain scale however, and in this environment, the sustainable free cash flow of content co's may be illusory, to some degree. I wonder if there is a good parallel in the 80's or 90's to this situation, and what happened there.

 

Media is a really good industry overall, and I think one could do quite well just to focus on this area. According to EY, Media is projected to have aggregate profitability of 28% for full year 2014, which beats out most indices.

 

Hence the Fox/Time Warner proposal (although I think Rupert mostly wanted HBO). That being said, consolidation on the right side is not the best of news, but it puts the emphasis again on having strong content (and imo, mainly news and sports) where Fox & TW outshine their peers.

 

To be honest, I don't get why CBS was spun from Viacom in the first place. It's funny that articles concerning the event (I was still in highschool playing videogames at that time) mention that "Last June, Viacom VIA disclosed plans to divide the assets to allow investors to track its faster-growing movie and advertising-supported cable units from the slower-growth broadcasting and publishing operations.".

 

Given the share price and business performance of the two, I would much rather have "tracked" the slower CBS activities..

 

I am staying away from Viacom for several reasons. a. Content does not seem that strong, b. large dependency on advertising revenues. Which if you combine it with a. is even worse because if cable operators are dropping your content, you're going to have a hell of a hard time of convincing ad agencies to spend their precious dollars with your "strong" content.

 

Content seems to be strong, for instance, comedy central is expanding its distribution to other avenues, including its own website and has a strong following in the 15-30 age group.  You can view these channels on mobile devices and take it with you on the go.  Having CBS would slow this initiative down and attempt to control how services are distributed and be more exposed to advertising revenue through standard distribution methods.  I understand some investors think CBS should combine with Viacom, but Viacom also has a door open to expand its distribution avenues and even advertising revenues.  Being a serial cannibal of its own stock also may not be recognized how valuable this can be in the future.  They already took out 200million shares in 4 years.  Even if advertising revenue declines, it can drop $200 m in earnings and still have no affect on the EPS.  Sure the market and perception may change, but we all know earnings can fluctuate and can be cyclical.  Thus, its a little self-fulfilling the company can control how fast and much the denominator in shares outstanding can decrease.

[Phaceliacapital]

Content seems to be strong, for instance, comedy central is expanding its distribution to other avenues, including its own website and has a strong following in the 15-30 age group.  You can view these channels on mobile devices and take it with you on the go.  Having CBS would slow this initiative down and attempt to control how services are distributed and be more exposed to advertising revenue through standard distribution methods.  I understand some investors think CBS should combine with Viacom, but Viacom also has a door open to expand its distribution avenues and even advertising revenues.  Being a serial cannibal of its own stock also may not be recognized how valuable this can be in the future.  They already took out 200million shares in 4 years.  Even if advertising revenue declines, it can drop $200 m in earnings and still have no affect on the EPS.  Sure the market and perception may change, but we all know earnings can fluctuate and can be cyclical.  Thus, its a little self-fulfilling the company can control how fast and much the denominator in shares outstanding can decrease.

 

Forgive me for asking, but why would a viacom/CBS merger slow down the distribution initiative? Isn't FOX operating a "viacom/CBS" model with its cable operations and tv stations? And you're right that advertising drop wouldn't have an impact on EPS, but should it happen I am more worried about why advertising revenues have dropped by such an amount rather than the impact it had on EPS.

 

Could you elaborate on the distribution avenues? Would be greatly appreciated!

 

and sorry for the late response but completely overlooked this topic!