VIAB - Viacom

[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.

[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