Shares of ViacomCBS slumped Monday amidst a broader market recovery as a few Wall Streeters a suggested a wait-and-see attitude to the company’s merger.
The stock was down 3.46% in mid-afternoon trade ahead of the close.
“ViacomCBS is clearly in the ‘show-me’ category, with a need to prove out merger execution and synergies as well as show [that] its ramp in Hollywood content spending … will produce greater future
profitability rather than just defend current market positions at what would then be lower margins,” said Credit Suisse media analyst Doug Michelson in a note where he lowered his rating on the stock from ‘outperform to ‘neutral.’
Other keys, he said, will be: renewing its NFL package at a reasonable price despite potential competition from Disney, which is crucial for CBS distribution leverage; fending off increased competition as Turner shifts to an unscripted strategy; getting Hulu and YouTube distribution;
whether the company’s streaming services will ramp to the point they offset investors’ traditional networks concerns; and how M&A and capital return strategies evolve.
He said ViacomCBS will generate less cash than it used to. That will reduces its ability to repurchase shares (which would have helped offset long-term terminal value concerns).
Michelson acknowledged the shares might be oversold in the short-term on Wall Street estimate cuts and traditional pay TV shortfalls for 2020 and that the stock trades at “a deep discount to asset value.” There’s clear potential for CEO Bob Bakish to drive enhanced merger synergies, he said. The question is how and how fast.
The merger closed in December. Late last week, Viacom announced that former NBCUniversal executive George Cheeks will be coming on in March as CEO of CBS Entertainment group – the head of CBS-branded assets at the combined company – replacing Joe Ianiello.
Separately Monday, Doug Creutz of Cowen said he expects increased OTT investment in 2020 at ViacomCBS may more than offset any continuing merger synergy benefits. “We expect the streaming wars to maintain pressure on media operating margins for the foreseeable future,” he said.
ViacomCBS reports fourth-quarter 2019 earnings on Feb. 20 – its first as a combined company. An analysts’ average sees earnings per share of $1.57 on revenue of $7.34 billion.
Creutz lowered his full-year 2020 earnings per share estimate from $6.31 to $5.97 to reflect incrementally negative subscriber trends, increased OTT investment, and slightly reduced film estimates.