An aggressive strategy
In time of crisis, stock investors often fly to defensive stocks. These are companies that will do relatively well during a downturn.
However, using a defensive strategy now is like looking at your rearview window and using that view to decide where to turn next. It would be a great strategy if you executed it prior to the stock market's downturn, or at the very early stages of the crisis. However, it is a little late now because stocks have become more expensive again.
To take advantage of the crisis situation and recovery, I believe investors might want to consider a more aggressive strategy aimed at catching the rebound of falling stocks. As an entertaimnet company going through a phase of changes, I think ViacomCBS (VIAC, Financial) could be a prominent candidate for such an aggressive strategy.
Navigating through the tough tide
People are more glued to the TV screen than ever during shelter-at-home orders. Although the higher viewership could be paired with lower advertising dollars, the negative impact of Covid-19 on the revenue is not likely be extreme, in my opinion. According to analyst data that I compiled, analysts are forecasting only a modest decline in earnings per share to $3.75 for full-year 2020, with strong predictions of $4.66 in EPS for 2021.
The company has $21 billion in debt and $0.63 billion in cash. The interest expense was about $1 billion in 2019. The debt level is high compared with its assets and equity value, but the company is profitable and relatively stable, and its 2019 operating profit was almost five times the interest payment. The company also raised $2.5 billion from debt markets in April 2020, half due in 2025 and half due in 2031. The yield is a modest 5%, suggesting the credit market is not seeing a bankruptcy risk yet. The long maturity date of the debt should provide the company ample cash to handle the crisis. If needed, the company can still cut its generous dividends, saving another half billion annually. Thus, I think the bankruptcy risk for this company is extremely low.
Valuation
The stock seems undervalued to me based on its earning power. The company is only traded at about 3.5 times its 2021 forward earnings, making it one of the cheapest in the movies and entertainment, especially compared with the likes of The Walt Disney Co. (DIS, Financial) or Fox Corp. (FOXA). If we choose to value slow growth companies at 10 times their average earning power, the intrinsic value of ViacomCBS is above $30 per share, given that its average EPS for the last 10 full years was about $3.38. This is a conservative historical estimation because I am not using the forecasted 2021 EPS, which I think might be too optimistic. If the company was forced to issue debt at a yield close to 10%, or issue stocks at the current price level to boost liquidity, its future earnings power would be further diluted.
A takeover target?
It is possible, given its relative small market capitalization, low valuation and rich content library, that the company could become a takeover target. I think the possibility is not high enough to factor into valuation yet. Since most of its industry rivals, even Disney, are in survival mode, the potential buyers are more likely tech giants who want to gain a bigger share in the entertainment industry.
Conclusion
According to my analysis, ViacomCBS is worth adding to a portfolio with an aggressive growth strategy. The downside risk is high, but the upside gain outweighs the risk, in my opinion. At the current $16 per share market price as of the writing of this article, I estimate it has the potential to double in a year.
Disclaimer: the numbers, analyses and opinions here are subject to errors and human biases. Those opinions cannot substitute your own rigorous research. You are responsible for your own investment decisions.
I own some or all of the shares mentioned in the article.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
