Trading in the high $30 range, the stock is very attractive, though investors should be prepared for a bumpy ride, particularly since the firm may be beginning a multiyear turnaround effort.
Sumner and Shari Redstone issued a statement on Dec. 12 asking Viacom
to end the deliberations about a merger of the two firms. The letter reverses the family’s position from a statement in September that asked the two firms to consider a reconsolidation of the firms. By ending the merger discussion, the Redstones appear to be willing to let the current temporary management team at Viacom pursue a stand-alone strategy for turning around the struggling media firm. We think that at CBS, the reconsideration of reconsolidation illustrates the power and respect that CEO Les Moonves commands at the firm. We are maintaining our arrow moat ratings for both firms and our fair value estimates of $53 for Viacom and $59 for CBS. With shares trading in 3-star territory, we would wait for a larger margin of safety before investing in CBS. With Viacom shares trading in the high-$30 range, we believe the stock is very attractive, though investors should be prepared for a bumpy ride, particularly since the firm may be beginning a multiyear turnaround effort.
Neil Macker, CFA, is an equity analyst for Morningstar.
According to media reports, Shari Redstone has been impressed by acting CEO Bob Bakish and his strategic plan for Viacom. Like many investors, the Redstones, who own 40% of both firms, view many of the assets at Viacom as undervalued and are tired of waiting for the firm to find a method of reversing this long-term decline in value. While slimming down its channel lineup may help in the short run, we believe that Viacom needs to ramp up its investment in TV and film production units to better compete in the rapidly evolving media space.
For CBS, the merger dissolution removes some of the overhang on the stock and the firm. We expect the firm to remain focused on expanding its TV production capability, particularly in support of the over-the-top offerings at both CBS and Showtime. We believe management will continue to pursue acquisitions or investment opportunities in the digital arena, particularly in distribution.
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