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ViacomCBS Sinks. 'An Old Business Model' Doesn't Offer Much Upside.

The selloff came following a report by The Wall Street Journal that ViacomCBS’s parent, National Amusements, has restructured its credit facilities with lenders to avoid selling ViacomCBS stock to meet its debt payments.

ViacomCBS stock was one of the worst performers in the S&P 500 on Thursday, tumbling 5.1% while the broader index rallied 6.2%.

ViacomCBS stock was one of the worst performers in the S&P 500 on Thursday, tumbling 5.1% while the broader index rallied 6.2%.

The selloff came following a report by The Wall Street Journal that ViacomCBS’s parent, National Amusements, has restructured its credit facilities with lenders to avoid selling ViacomCBS stock (ticker: VIAC) to meet its debt payments. As part of the deal, National Amusements will have a revolving facility of $125 million to fund operations of its theater business, but is giving up access to a $75 million credit line, the Journal reported.

The deal wasn’t accepted well by the market at a time when National Amusements’ key revenue drivers—movie theaters, new film releases and live-sports broadcasts from the CBS network—have all come to a halt because of the Covid-10 pandemic.

Investors were also spooked as Bernstein analyst Todd Juenger cut his price target on ViacomCBS shares to $10 from $24.

Stocks in the media industry, including ViacomCBS, AMC Networks (AMCA) and Discovery (DISCA), don’t seem to offer much upside for investors in the Covid-19 aftermath, according to Juenger. The group relies almost “entirely on an old business model with both severe adverse structural forces and cyclical risk, as well as the pre-existing condition of overly extended balance sheets,” he wrote in a Thursday note.

ViacomCBS is the result of a merger between CBS and Viacom last December. The deal was a response to the rapidly changing media-and-entertainment industry, where users have been ditching cable and satellite-TV bundles in favor of on-demand online streaming services such as Netflix (NFLX) and Amazon.com’s (AMZN) Prime Video.

Investors didn’t seem convinced that the merger would address the industry’s underlying challenges. ViacomCBS stock tumbled from nearly $41 on its first trading day to $36 as of Feb. 19, before dropping more sharply since.

The recent economic disruptions caused by the coronavirus have only added to the headwinds on earnings, while the unknown effects of the pandemic—including the possibility of a recession—have more than halved the stock’s valuation. Price-to-forward earnings ratio has shrunk from 5.9 times on Feb. 19 to 2.5 times this week.

Since Feb. 19, shares in the media giant have shed nearly two thirds of their value to $13.99 a share on Thursday. That’s bad even amid the coronavirus-triggered market selloff. The S&P 500 has lost 24% during the same period.

In the event of prolonged Covizd-19 disruptions or a lingering recession, media stocks would be facing even more significant downside, Juenger said. Earnings would be hit hard because of an increase in cord-cutting and a prolonged drop in TV advertising demand, which, according to Juenger, might not recover. In this scenario, he expects ViacomCBS stock to fall to $8 a share in the next 12 months, Discovery to $11, and AMC Networks to $14.

In a slightly less bearish scenario, Juenger expects ViacomCBS stock to trade at $12, Discovery at $19, and AMC Networks at $28. Even if the economy snaps back quickly with no lingering impacts, he thinks investors could find other stocks with much more upside during the market recovery.

Write to Evie Liu at evie.liu@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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