Top media analysts have cut their short-term growth prospects for ViacomCBS following last week’s financial disclosures that came as part of the closing of CBS Corp.’s stock-swap takeover deal for Viacom.
In the Oct. 17 filing, CBS Corp. released specific year-to-year projections for its free cash flow yield, guidance that the company has not offered Wall Street in the past. CBS’ numbers were much lower than those modeled in recent months by top Wall Street analysts at MoffettNathanson, Barclays, JPMorgan, Guggenheim, UBS and other banks. The numbers underscore that CBS intends to spend significantly in the coming year to ramp up its investment in content for CBS, Showtime and other platforms.
The filing elicited sharp words from longtime CBS watcher Michael Nathanson, who argued that CBS had an obligation to correct analysts about the big gap between their free cash flow models and the actual numbers shaping up inside the company.
From CBS’ perspective, the onus is on the analysts and their modeling, not the company. CBS has issued financial guidance for revenue, earnings per share and operating income before depreciation and amortization (OIBDA) covering three-year periods — guidance that analysts used to help develop annual forecasts for metrics such as free cash flow, which has become an increasingly important barometer of health for media giants.
Analysts noted that CBS’ total revenue forecasts for 2019 ($15.9 billion), 2020 ($16.3 billion) and 2021 ($18.2 billion) came in higher than most analysts projected: 3% higher in 2019 and 2020 than MoffettNathanson estimates and 8% higher in 2021. (The estimates in the filing cover CBS as if it were to continue as a standalone company, not the combined financials for ViacomCBS.)
“Over the year, the CBS board and CBS management knew Street numbers were wildly wrong on free cash flow, but somehow never shared that consequential data point,” Nathanson wrote. He was highly critical of CBS allowing analysts to weigh in with their observations on the CBS-Viacom merger prospects prior to the Aug. 13 deal announcement on the basis of what proved to be inaccurate Street estimates for CBS.
CBS’ projections in the S-4 filing had unlevered free cash flow for 2019 coming in at $1.21 billion, compared to MoffettNathanson’s $1.51 billion estimate. The gap in 2020 is even bigger, with CBS projecting nearly $1.1 billion compared to MoffettNathanson’s estimate of $1.74 billion. Despite its blunt criticism of CBS, MoffettNathanson maintained its Buy rating on CBS shares but slashed its price target by $7 to $51. Nathanson declined to elaborate on his Oct. 18 note.
CBS has repeatedly talked up its plan to invest heavily in new content in the near term. That plan will cut into its profitability in the early part of the three-year horizon for CBS’ formal Wall Street guidance stretching to 2021. CBS has made the case that those investments will pay off through higher licensing and subscription revenue in the long run.
Other analysts had milder reactions than Nathanson to the S-4 numbers, but all of them cut their price targets on the stock, which will affect their future ratings on the merged company. Guggenheim trimmed its 12-month target by $6 to $50. Bank of America Merrill Lynch, on the other hand, maintained its price target of $63. UBS maintained its Neutral rating and price target of $54. CBS and Viacom have said they expect the deal to close by year’s end.
“Despite greater than expected content investment, we believe healthy top-line trends remain visible,” Bank of America Merrill Lynch’s Jessica Reif Ehrlich wrote in an Oct. 18 note. “Our long-term estimates are largely in line with CBS managements pro forma forecast,” wrote UBS analyst John Hodulik.
Bernstein Co. analyst Todd Juenger, who is not one to mince words in his commentary, made similar revisions to his models for CBS based on the filing. He cut his target price for CBS by $3 to $32 and maintained his Underperform rating on shares. Juenger was one of the loudest voices on Wall Street arguing against the CBS-Viacom reunion, given his longstanding criticism of Viacom.
“We defer to near-term management forecasts, as they have much better information about operational drivers. They also have strong incentive to forecast as positively as possible, as they were in a share-ratio negotiation with each other (they also have a counter-balancing incentive not to over-exaggerate their forecast, due to risk of potential shareholder litigation),” Bernstein wrote in a note issued Wednesday. “CBS management explained to us the lower earnings and, especially, FCF as a result of heightened programming investment. We are not surprised, and agree.”
Nathanson argued that the new projections indicate that the merged ViacomCBS will be under pressure to cut costs and sell off non-core assets. There’s been speculation that ViacomCBS might shop its Simon & Schuster publishing unit once the merger deal is completed. Nathanson also called on the merged company to offer more detailed financial information to Wall Street.
“The company’s management (and the new board) should move quickly to help erase the stench of this deal process by selling non-core assets and aggressively cutting costs,” Nathanson wrote. “Furthermore, it is about time that CBS improves their disclosure to better call out the underlying revenue drivers of each division. Also, the controlling shareholder should take note that a stock’s multiple is a reflection of the market’s perception of corporate governance and, in this case, the market’s vote has been correct. Time will tell if this can be reversed.”