ViacomCBS received a notable analyst upgrade from “hold” to “buy” on Monday, as Deutsche Bank analyst Bryan Kraft noted that the media conglomerate was attractive to investors due to its “positive fundamental developments, improved disclosure and optionality from industry consolidation.” Kraft also called it his “top pick in media.”
The Wall Street expert also increased his price target on ViacomCBS shares by $4 to $43, “driven by our higher long-term streaming revenue forecast and time value of money appreciation since our last update.” In early Monday trading, the stock was down 2 percent at $34.69 as the broader market dropped.
Kraft addressed some investor concerns about the company, led by CEO Bob Bakish and chair Shari Redstone. “We understand the skepticism toward ViacomCBS,” he noted, continuing: “Intellectual property might not as strong as Disney or WarnerMedia, not everyone will win in streaming, free cash flow conversion rate has been disappointing historically, content investment is likely to increase further.”
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However, the company “does have intellectual property that has and continues to create hits, as demonstrated by the recent success of this season’s Yellowstone premier, as well as the premier of prequel 1883,” the expert argued. “While not everyone will succeed in streaming, we think Viacom has an opportunity to transition its business model successfully given its content portfolio (including sports rights), brands, globally sourced content production model and an approach to the market that includes on-demand entertainment, linear channel feeds, sports and news in all three streaming formats – subscription, subscription + advertising and free ad supported streaming.”
Kraft also argued that a company investor day during the first quarter would “provide visibility into free cash flow reinvestment that will make the market more comfortable.”
Addressing potential continued industry consolidation, Kraft argued that ViacomCBS could be involved here “as mega-capitalization tech sets its sights on becoming bigger streaming players, while current media industry players also potentially look for additional scale opportunities.” Anyone considering buying ViacomCBS will notice that its enterprise value is “a fraction of that of the other four scaled content companies, yet its annual content budget places it within the range of this peer group,” the analyst highlighted. “This makes Viacom the most digestible scaled content asset in a consolidating environment.”
After all, the stock trades at “the lowest enterprise value/sales multiple (1.2 times 2022 estimates) and one of the lowest enterprise value/earnings before interest, taxes, depreciation and amortization multiples (7.2 times) within our 27-stock coverage universe,” the Deutsche Bank expert explained. “Another lens for considering valuation is to look at the company’s total enterprise value/estimated 2022 streaming revenue, which is only 5.2 times (versus about eight times for other streaming businesses, including Netflix and Roku). If ViacomCBS were to trade at eight times 2022 streaming revenue, it would trade at $61. This approach doesn’t assign any value to the linear television business or Paramount, making it a very conservative approach.”
