Stocks

ViacomCBS Stock Up 160% But Full Recovery Is Not Yet Complete

We believe that ViacomCBS stock (NASDAQ: VIAC) may be a decent opportunity at the present time. VIAC trades at $29 currently and is, in fact, down 29% so far this year (from $41 at the beginning of 2020). It traded at $35 in February 2020 – just before the coronavirus pandemic hit the world – and is currently still 16% below that level, as well. This is despite VIAC stock gaining over 160% from its March lows of $11 to reach $29 as on 7th October 2020, compared to the S&P 500 which increased a little over 50% during this time. The stock outperformed the broader market because of strong performance of its streaming business during the pandemic and stimulus measures announced by the Fed. In addition to the stock being significantly below its pre-Covid levels, the gradual lifting of lockdowns has increased expectations of revival in the company’s traditional cable and studio businesses as well, which could lead to an increase in the stock price once the current crisis abates. Our conclusion is based on our detailed comparative analysis of ViacomCBS stock performance during the current crisis with that during 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline for 2020 Crisis So Far:

  • 12/12/2019:  Coronavirus cases first reported in China
  • 1/31/2020:  WHO declares a global health emergency.
  • 2/19/2020:  Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 50% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how VIAC stock and the broader market performed during the 2007-08 crisis.

Timeline for 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

VIAC and S&P 500 Performance Over 2007-08 Financial Crisis

VIAC stock declined from levels of over $23 in September 2007 (pre-crisis peak) to levels of less than $4 in March 2009 (as the markets bottomed out), implying VIAC stock lost 85% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of close to $12 in early 2010, rising by 237% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.

VIAC Fundamentals Over Recent Years Have Been Strong

ViacomCBS revenues increased from $26.5 billion in 2017 to $27.8 billion in 2019, due to higher TV and Filmed entertainment revenues. (The company’s revenues prior to 2017 are not comparable as the effect of the merger between Viacom and CBS is not accounted for in the prior years). Along with higher revenues, margins also improved over recent years with EPS increasing from $3.63 in 2017 to $5.38 in 2019. However, the company’s Q2 revenues saw a 12% y-o-y decline. Earnings came in at $0.78/share as against $1.59/share in the year-ago period, mainly due to lower revenue and higher restructuring expense.

Does VIAC Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

VIAC’s total debt more than doubled from $9.5 billion in 2017 to $19.7 billion at the end of Q3 2020, while its total cash shot up from $285 million to $2.3 billion over the same period. At the same time, the company’s cash from operations halved from $2.4 billion to $1.2 billion. Though the company will weather the impact of the pandemic, lower cash generation and significantly higher debt burden could prove to be an impediment in realizing all of the potential gains post the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand,a decline in the number of new cases, and progress with vaccine development buoy market sentiment

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. As investors focus their attention on expected 2021 results, we believe ViacomCBS stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest. That said, the pressure on the company’s balance sheet in the form of high debt and low cash remains a risk factor to the realization of these gains.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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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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