Cabot Undervalued Stocks Advisor 121

Thank you for subscribing to the Cabot Undervalued Stocks Advisor. We hope you enjoy reading the January 2021 issue.

With the turning of the calendar, we list eleven long-term secular trends that we see shaping the world for years to come. We also include four additional trends that investors may think are enduring yet which we have less certainty about their ability to continue indefinitely.

Contrarian investors can benefit from considering these trends. Sometimes the most appealing stocks are those that superficially go against them.

The current recommended list includes 14 names, with Merck (MRK) and U.S. Bancorp (USB) added this month. Earning season is starting soon, so we’ll get updates on how these companies are faring and provide our commentary and analysis on them.

Please feel free to send me your questions and comments. This newsletter is written for you and the best way to get more out of the letter is to let me know what you are looking for.

I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.

Cabot Undervalued Stocks Advisor 121

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Some Thoughts on Macro Trends
Years ago, widely respected economist Herbert Stein said “… if something cannot go on forever, it will stop.” We use this thinking to help evaluate macro trends in the economy and the world in general. One variant of this line of thinking is that some trends actually can go on forever, or at least indefinitely. So, when we look at long-term, secular trends, we often will assume that they will continue until we see sufficient evidence that they will stop.

Some secular trends that we see continuing indefinitely:

• Advances in technology and healthcare beyond what is currently imagined, including new capabilities driven by 5G communications
• Digitization of everything and migration to streaming/subscription formats
• Shift to renewable energy and away from carbon fuels, with an eventual transition to electric vehicles
• More government, commercial, and consumer travel to space
• Slowing/stalling/reversing population growth in major countries
• China’s increasing economic and geopolitical strength
• Congress spending money it doesn’t have and the Federal Reserve buying the freshly-issued Treasury debt that funds it
• Cyber-attacks on governments, businesses, and consumers
• Time spent playing video games
• Healthier foods, behaviors, and environments
• Economies, markets, and commodity prices moving in cycles.

Listed below are four secular trends that investors seem to confidently believe will continue indefinitely, but where we are less confident:

• Dining/working/schooling at home
• Low interest rates and low inflation
• Strong/flat U.S. dollar
• Migration to single family houses/suburbs from cities.

While our investment recommendations focus on specific stocks, we like to keep these macro trends in mind. Investors generally prefer stocks that ride these trends. But, sometimes the most appealing stocks are those that superficially seem to go against these trends (leading to investors avoiding them) yet have either fundamental traits that sidestep these trends or have overly discounted valuations. A recent example is Molson Coors (TAP), which at best is neutral regarding these trends. Yet, investor misperception led to an excessively discounted share price, and (so far, at least) a solid profit in this recommended name.

Some of these secular trends are favorable and clear positives (tech and health, as examples) yet others are concerning (China, market cycles, government spending). Like anything dealing with the future, we don’t know for sure how all fifteen of the trends are going to turn out or what the knock-on effects will be. There are certainly other trends which we don’t see but are nevertheless in motion. We try to be diversified and flexible in our investment thinking and have a lot of curiosity and patience.

It’s an exciting time to be an investor.

Share prices in the table reflect Tuesday (January 5) closing prices. Please note that prices in the discussion below are based on mid-day January 5 prices.

Note to new subscribers: You can find additional color on recent earnings and other news on recommended companies in prior editions of the Cabot Undervalued Stocks Advisor on the Cabot website.

Send questions and comments to Bruce@CabotWealth.com.

Upcoming Earnings Releases
January 20: U.S. Bancorp (USB)
January 21: JetBlue (JBLU)
January 28: Dow (DOW)

Today’s Portfolio Changes
None

Portfolio Changes During the Past Month
U.S. Bancorp (USB) – new Buy
Merck (MRK) – new Buy
Equitable Holdings (EQH) – from Buy to Hold
JetBlue (JBLU) – reducing price target to 19 from 20

Growth & Income Portfolio

Growth & Income Portfolio stocks are generally higher-quality, larger-cap companies that have fallen out of favor. They usually have some combination of attractive earnings growth and an above-average dividend yield. Risk levels tend to be relatively moderate, with reasonable debt levels and modest share valuations.

Bristol-Myers Squibb Company (BMY) is a New York-based global biopharmaceutical company. In November 2019, the company acquired Celgene for a total value of $80.3 billion, including $35.7 billion in cash and $40.4 billion in stock. We are looking for Bristol-Myers to return to overall revenue growth, both from resilience in their key franchises (Opdivo, Revlimid and Eliquis) and from new products currently in their pipeline. We also want to see the company execute on its $2.5 billion cost-cutting program which will likely remain intact with the MyoKardia acquisition.

There was no meaningful news on the company this past week.

BMY shares were flat in the past week and have about 28% upside to our 78 price target.

The stock trades at a low 8.2x estimated 2021 earnings of $7.46 (down 1 cent from last week). With its recently increased dividend, BMY now has a 3.2% dividend yield. This dividend is well-covered by the company’s enormous free cash flow. BUY.

Cisco Systems (CSCO) is a $48 billion (revenues) technology equipment and services company. About 72% of revenues are from equipment sales, including gear that connects and manages data and communications networks, along with application software, security software and related services. Cisco provides a valuable one-stop-shop for its customers. The company is shifting its business mix to a software and subscription model and ramping up new products, helped by its strong reputation and its entrenched position within its customers’ infrastructure.

Cisco’s share price is now only about half its March 2000 peak, partly due to excessive overvaluation then. More recently, the shares reflect Cisco’s struggle in its core business against the rising adoption of cloud computing, which reduces the need for Cisco’s gear. Cisco’s prospects are starting to improve, with CEO Chuck Robbins in the CEO seat (since 2015), starting a slow but steady process to reinvigorate its operations. An impressive new CFO joined in December 2020.

The company is highly profitable and generates vast cash flow, which it returns to shareholders through its dividend and share buybacks. The balance sheet carries $30 billion in cash, double the $14.6 billion in total debt.

There was no meaningful news on the company this past week.

CSCO shares fell 3% in the past week and have about 26% upside to our 55 price target. The shares trade at a low 13.8x estimated FY2021 earnings of $3.16. This estimate was unchanged in the past week. On an EV/EBITDA basis on FY2021 estimates, the shares trade at a discounted 9.7x multiple. CSCO shares offer a 3.3% dividend yield. BUY.

Coca-Cola (KO) is best-known for its iconic soft drinks yet also has a strong portfolio of non-soda brands, including PowerAde, Fuze Tea, Glaceau, Dasani, Minute Maid and Schweppes. Nearly 40% of its revenues now come from non-soda products across the non-alcoholic spectrum, including juice/dairy/plant beverages, water/hydration drinks, tea and coffee, and energy drinks. Its vast global distribution system offers it the capability of reaching essentially every human on the planet.

Relatively new CEO James Quincey (2017) is a highly-regarded company veteran with a track record of producing profit growth and making successful acquisitions. Coca-Cola is reorganizing to become more effective and more efficient, refocusing its innovation efforts and culling its portfolio of over 400 brands by 50% to focus on its highest-priority offerings. The company is working to improve its image (and reality) of selling sugar-intensive beverages that are packaged in environmentally-insensitive plastic.

While near-term outlook is clouded by pandemic-related stay-at-home restrictions, the secular trend away from sugary sodas, high exposure to foreign currencies and always-aggressive competition, the longer-term picture looks bright. Supporting the company is its sturdy balance sheet that carries over $21 billion in cash, offsetting much of its $53 billion in debt. Its growth investing, debt service and $0.41/share quarterly dividend are well-covered by solid free cash flow.

There was no meaningful news on the company this past week.

KO shares fell 3% in the past week. The stock has about 22% upside to our 64 price target. RBC Capital Markets downgraded the shares to neutral on Monday, likely driving a 4% decline in the price, but their focus was on the timing of a post-pandemic recovery rather than anything fundamentally worrisome about Coca-Cola.

While the valuation is not statistically cheap, at 24.7x estimated 2021 earnings of $2.12 and 22.4x estimated 2022 earnings of $2.34 (the 2021 estimate ticked up a cent in the past week), the shares are undervalued while also offering an attractive 3.1% dividend yield. BUY.

Dow Inc. (DOW) merged with DuPont in 2017 to temporarily create DowDuPont, then split into three parts in 2019 based on the newly combined product lines. Today, Dow is the world’s largest producer of ethylene/polyethylene, the world’s most widely-used plastics. Dow is primarily a cash-flow story driven by three forces: 1) petrochemical prices, which are often correlated with oil prices and global growth, along with competitors’ production volumes; 2) volume of chemicals sold, largely driven by global economic conditions, and 3) ongoing efficiency improvements (a never-ending quest for all commodity companies to maintain their margins).

There was no meaningful news on the company this past week.

Dow shares lifted about 1% this past week and have about 9% upside to our 60 price target. The shares trade at 17.2x estimated 2022 earnings of $3.18, although these earnings are two years away. This estimate slipped fractionally in the past week.

The high 5.1% dividend yield is particularly appealing for income-oriented investors. Dow is currently more than covering its dividend and management makes a convincing case that it will be sustained. However, there is a small risk of a cut if the economic and commodity recoveries unravel. HOLD.

Merck (MRK) – With $47 billion in revenues, Merck is a major pharmaceutical company that focuses on oncology, vaccines, antibiotics, and animal health. Keytruda, a blockbuster oncology treatment representing about 30% of total revenues, holds an impressive franchise that is growing at a 20+% annual rate. The relatively new Lynparza and Lenmiva cancer treatments offer considerable promise, as do other pipeline products. Merck is not a front-runner in developing Covid-19 vaccines but has developed a treatment for hospitalized patients with severe or critical Covid-19 cases.

Merck’s sizeable animal health business is seeing about 8-10% revenue growth and produces about 10% of Merck’s total sales. Merck has a solid balance sheet and is highly profitable.

To narrow its strategic focus, Merck will spin off its Women’s Health business, along with its biosimilars and various legacy brands. These segments currently generate roughly 15% of Merck’s total revenues yet comprise half of its product roster. Merck also recently divested its stake in Moderna, the producer of a promising Covid treatment. Given the high valuations of other animal health businesses like Elanco and Zoetis, we would not be surprised to see Merck spin off or divest its animal health business in the future.

Primary risks include its dependence on the Keytruda franchise, possible generic competition for its Januvia diabetes treatment starting in 2022, and the possibility of government price controls.

There was no meaningful news on the company this past week.

Merck shares were flat this past week and have about 31% upside to our 105 price target. Valuation is an attractive 12.8x next year’s estimated earnings of $6.28 (estimate unchanged in past week). The 3.2% dividend yield offers additional income-oriented investors. Merck produces generous free cash flow to fund this dividend as well as likely future dividend increases. BUY

Tyson Foods (TSN) is one of the world’s largest food companies, with over $42 billion in revenues last year. Beef products generate about 36% of total revenues, while chicken (31%), pork (10%), and prepared/other contribute the remaining revenues. It has the #1 domestic position in beef and chicken with roughly 21% market share in each. Its well-known brands include Tyson, Jimmy Dean, Hillshire Farms, Ball Park, Wright and Aidells. Tyson’s long-term growth strategy is to participate in the growing global demand for protein. The company has more work to do to convince investors that its future is brighter, particularly as it is more of a commodity company (and hence has lower margins) compared to its food processor peers.

Tyson recently raised its dividend by 6% to $0.445 per quarter. Tyson’s recovery will remain volatile from quarter to quarter but is on the right track.

There was no meaningful news on the company this past week.

The stock fell about 2% in the past week and has about 19% upside to our 75 price target. Valuation is attractive at 11.1x estimated 2021 earnings of $5.69. This estimate was unchanged in the past week. Currently the stock offers a 2.8% dividend yield. BUY.

U.S. Bancorp (USB) is a Minneapolis-based bank. With $540 billion in assets and a $70 billion market value, it is the one of the largest commercial banks in the country. Its focus is on consumer and commercial banking through its 2,730 branches in the Midwest, southwest and western United States. It also offers a range of wealth management and payments services. Unlike majors JP Morgan, Bank of America and Goldman Sachs, U.S. Bancorp has essentially no investment banking or trading operations.

Like many banks, U.S. Bancorp is out of favor with investors. The shares remain well-below their year-end 2019 price as investors worry about a potential surge in credit losses due to Covid-related shut-downs as well as the profit-draining low interest rate environment. U.S. Bancorp’s third quarter non-performing assets (a measure of the dollar amount of assets that are not current with interest and principal payments) are 30% larger than a year ago. How high this balance ultimately climbs is unknown but investors are concerned that losses will accelerate once federal income support and stimulus funding is removed.

The bank’s capital level (technically, the Common Equity Tier 1 capital ratio, or CET1), fell to 9.4% of assets compared to the year-ago level of 9.6%. Its net interest margin was a modest 2.67% in the third quarter, compared to 3.02% a year ago. The bank generates profits on the difference between the interest rate it can earn on its lending and the interest rate it pays for its deposits. The low interest rate environment, driven by the Federal Reserve’s policy, is suppressing this difference. Given the Fed’s current guidance, low interest rates could be here for a long time.

However, U.S. Bancorp is one of the best-run banks in the country. Long known for conservative lending, its non-performing assets are only 0.41% of its total assets, lower than most peers and only modestly higher than a year ago. The bank has set aside reserves for bad loans equal to 2.61% of total loans – a remarkably high amount and equal to 6.3x its balance of non-performing assets. Unlike the prior cycle, where home mortgage lending produced industry-rattling losses, home mortgage lending today is a source of credit strength. While U.S. Bancorp’s capital ratio fell compared to a year ago, it remains robust, particularly given its sizeable credit reserves. Importantly, U.S. Bancorp maintains a tight cost control culture, with non-interest expenses of only 56.6% of total revenues (excluding securities gains/losses).

Overall, we see little risk to the bank’s financial health from the likely continued rise in credit losses. While low interest rates compress the bank’s profits, we believe these profits are as weak as they are likely to get. Any increase in interest rates would help boost lending profits – an outcome that we believe is somewhat likely. The company announced in late December a new $3 billion share buyback program that will start in January – sooner than we expected.

There was no meaningful news on the company this past week.

The shares fell about 2% in the past week and have about 26% upside to our 58 price target. Valuation is a modest 11.3x estimated 2022 earnings of $4.06. On a price/tangible book value basis, USB shares trade at a not-modest 1.9x multiple, but this ratio ignores the value of its payments, investment management and other service businesses that have low tangible book values but produce steady and strong earnings. Currently the stock offers an appealing 3.7% dividend yield. BUY.

Buy Low Opportunities Portfolio

Buy Low Opportunities Portfolio stocks include a wide range of value opportunities, often with considerable upside. This group may include stocks across the quality and market cap spectrum, including those with relatively high levels of debt and a less-clear earnings outlook. The stocks may not pay a dividend. In all cases, the shares will trade at meaningful discounts to our estimate of fair value.

Columbia Sportswear (COLM) produces the highly recognizable Columbia brand outdoor and active lifestyle apparel and accessories, as well as SOREL, Mountain Hardware, and prAna products. For decades, the company was successfully led by the one-of-a-kind Gert Boyle, who passed away late last year. The Boyle family retains a 36% ownership stake and Gert’s son Timothy Boyle remains at the helm.

After a disappointing third quarter, after which the stock fell sharply, as price-sensitive investors we raised COLM shares back to a Buy. We think the company low-balled its guidance, with its long-term earnings power impeded but pushed out into the future. It also announced personnel changes in several key operational roles. Columbia’s balance sheet remained solid.

There was no meaningful news on the company this past week.

Columbia’s shares fell about 3% this past week and have about 17% upside to our 100 price target. Valuation is 23.2x estimated 2021 earnings of $3.67, with the earnings estimate unchanged from last week. On 2022 estimated earnings of $4.63, the valuation is a more reasonable 18.4x. For comparison, the company earned $4.83/share in 2019. BUY.

Equitable Holdings (EQH) owns two principal businesses: Equitable Financial Life Insurance Co. and a majority (65%) stake in AllianceBernstein Holdings L.P. (AB), a highly respected investment management and research firm. Acquired by French insurer AXA in 1992, Equitable began its return to independence with its 2018 initial public offering as part of a spinoff. AXA currently owns less than 10% of Equitable. With its newfound independence, Equitable is free to pursue new opportunities.

The company is well-capitalized and has significant liquidity. It continues to de-risk and de-capitalize its balance sheet. Its diverse, high-quality investment portfolio is hedged against adverse changes in interest rates and equity markets. Equitable’s lower capital requirements are helping it continue its share repurchase program. The company is targeting a 50-60% of earnings payout ratio in the form of combined dividends and share repurchases.

AllianceBernstein shares (AB) are modestly attractive in their own right, partly due to their high 8.3% dividend yield. Prospective investors should be aware that the shares represent a limited partnership interest, may produce K-1 taxable income, and have other tax implications. Our October 14^th note has more color on AllianceBernstein. AB shares continue to remain relatively strong.

While Equitable’s large variable annuities book may be vulnerable to market pullbacks, the company continues to slowly but steadily prove its stability and strength.

There was no meaningful news on the company this past week.

EQH shares slipped 1% in the past week and have about 13% upside to our 28 price target. The market’s volatility likely incrementally pressured the shares, as the company’s balance sheet and book value are often viewed as being a leveraged and hedged investment fund.

We recently reduced EQH shares to a Hold as they approached our 28 price target. We won’t likely return the shares to a Buy unless the stock fades meaningfully further. The valuation is no longer compelling at 93% of tangible book value, although on earnings the shares look attractive at 4.8x estimated 2021 earnings of $5.23 (up one cent in the past week). The shares offer an attractive 2.7% dividend yield. HOLD.

General Motors (GM) under CEO Mary Barra (since 2014) has transformed from a lumbering giant to a well-run and (almost) respected auto maker. The company has smartly exited many chronically unprofitable geographies (notably Europe) and trimmed its passenger car roster while boosting its North American market share with increasingly competitive vehicles, particularly light trucks. We consider its electric and autonomous vehicle efforts to be near industry-leading. We would say it is perhaps 75% of the way through its gas-powered vehicle turnaround and is well-positioned but in the very early stages of its EV development. GM’s balance sheet is sturdy, with Automotive segment cash exceeding Automotive debt. Its credit operations are well-capitalized but may yet be tested as the pandemic unfolds.

After a remarkably strong third quarter, GM outlook is for a strong 2021, with perhaps a return to $6.50 in per share earnings that it would otherwise have produced in 2020.

There was no meaningful news on the company this past week.

GM shares slipped 1% this past week and have about 19% upside to our recently-raised 49 price target. Valuation is at 6.9x estimated 2021 earnings of $5.98. This estimate was unchanged this past week. Our 49 price target can be thought of as assuming a 7x multiple of $7.00 in earnings. The 2022 estimate is already at $6.49, so a few strong quarters (which GM is capable of) would likely raise estimates enough for the shares to reach our target. HOLD.

JetBlue Airlines (JBLU) is a low-cost airlines company. Started in 1999 from JFK Airport in New York City, the company has grown to now serve nearly 100 destinations in the United States, the Caribbean and Latin America. The company’s revenues of $8.1 billion in 2019 compared to about $45 billion for legacy carriers like United, American and Delta, and were about a third of Southwest Airlines ($22 billion).

Its low fares and high customer service ratings (with among the highest customer satisfaction ratings in the industry) have built strong brand loyalty. Low costs, including its point-to-point route structure, have helped JetBlue produce high margins in the past, particularly relative to the legacy carriers. Its TrueBlue mileage awards program is a recurring source of profits, as it sells miles to credit card issuers.

While the pandemic has sent JetBlue, and the entire industry, into a near-term depression, we believe consumers (and eventually business travelers) are likely to return to flying. Good news on Covid vaccines, the continued economic recovery, and pent-up demand are starting to bring back passengers. To help reduce its $6 million/day cash burn (cash outflows from operating losses and capital spending), JetBlue is aggressively cutting its costs and benefitting from significantly lower fuel prices than a year ago. Its cash balance of $3.6 billion, bolstered by a recent equity raise (which led to our price target trim to 19 from 20), gives it plenty of time to recover. The company’s debt is somewhat elevated at $4.8 billion.

The shares carry more than the usual amount of risk, given uncertainties from the pandemic, fuel costs, labor issues, high capital spending, elevated debt, the ever-present risk of irrational competition and the overall economy.

JetBlue will start taking delivery of 70 new Airbus A220 jets, which will gradually replace its fleet of 60 Embraer 190 aircraft. The Airbus jets should help JetBlue reduce its operating costs by as much as 30% per seat and maintenance costs by as much as 40% per seat, compared to the Embraer jets. Importantly, the new jets will provide the airline with more flexibility to expand its operations to new locations that are currently uneconomic with the older jets. The risk is that flight demand isn’t sufficiently high to pay for the cost of the jets, although we are optimistic that this risk is relatively low.

JBLU shares fell 5% this past week and have 35% upside to our 19 price target.

The stock trades at 13.3x estimated 2022 earnings of $1.06 (this estimate is unchanged over the past week and is volatile based on Covid case trends). On an EV/EBITDA basis, the shares trade at 5.4x estimated 2022 EBITDA. BUY.

Molson Coors Beverage Company (TAP) – The thesis for this company is straight-forward – a reasonably stable company whose shares sell at a highly discounted price. One of the world’s largest beverage companies, Molson Coors produces the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft, and specialty beers. About two-thirds of its $10 billion in net revenues are produced in the United States, where it holds a 24% share of the beer market.

Investors’ primary worry about Molson Coors is its lack of meaningful (or any) revenue growth as it has relatively few of the fast-growing hard seltzers and other trendier beverages in its product portfolio. Our view is that the company’s revenues are resilient, it produces generous cash flow and is reducing its debt, traits that are value-accretive and underpriced by the market. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products.

We anticipate that the company will resume paying a dividend mid-year, perhaps at a $0.35/share quarterly rate, which would provide a generous 3.0% yield.

There was no meaningful news on the company this past week.

TAP shares rose 3% in the past week and have about 26% upside to our 59 price target.

Estimates for 2020-2022 ticked up in the past week. TAP shares trade at 11.1x estimated 2021 earnings of $4.21. This valuation is low, although not the stunning bargain from a few months ago.

On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.2 current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.

For investors looking for a stable company trading at a low valuation, TAP shares continue to have contrarian appeal. Patience is the key with Molson Coors. We think the value is solid although it might take a year or two to be fully recognized by the market. BUY.

Terminix Global Holdings (TMX) is both a new company and an old company. While the name “Terminix” is one of the largest and most widely recognized names in pest control, the company previously was obscured inside of the ServiceMaster conglomerate. With the sale of ServiceMaster Brands, the company changed its name to Terminix. The company appears to have fully addressed its legal liability from deficient termite treatments, removing an overhang on its shares. A new CEO, Brett Ponton, former head of Monro (MNRO), joined in August 2020. His leadership at Monro led to sales growth and a strong recovery in its share price. Our expectation is that he will bring sales growth, operational efficiency and integrity to Terminix, ultimately leading to a higher share price. The company’s balance sheet is in good condition.

There was no meaningful news related to the company this past week.

Terminix shares slipped about 1% in the past week and have 14% remaining upside to our 57 price target.

Reliable consensus 2022 earnings estimates appear to be settling at around $1.43/share. This would put the TMX multiple at a high 35.0x, but we recognize that these types of companies generally are valued on EV/EBITDA. On this basis, the shares trade at about 17.9x EBITDA.

Major risks include the possibility of higher litigation expenses, difficult industry competition that may exert pricing pressure, and possible execution risks by the new leadership. TMX shares carry more risk than typical CUSA stocks, but if its litigation and sub-par margins are behind them, we see a clear path to a higher stock price.

With a reasonable valuation, solid balance sheet, renewed focus and better revenue and margin outlook, there is a lot to like about Terminix. BUY.

ViacomCBS (VIAC) is a major media and entertainment company, owning highly recognized properties including Nickelodeon, Comedy Central, MTV and BET, the Paramount movie studios, Showtime and all of the CBS-related media assets. The company’s brands are powerful and enduring, typically holding the #1 market shares in the highest-valued demographic groups in the country. ViacomCBS’s reach extends into 180 countries around the world. Viacom and CBS re-merged in late 2019 and are now under the capable leadership of former Viacom CEO Robert Bakish.

Viacom is being overhauled to stabilize its revenues, boost its relevancy for current/future viewing habits and improve its free cash flow. The company is shifting away from advertising (currently about 36% of revenues) and affiliate fees (currently about 39% of revenues), toward content licensing – essentially renting its vast library of movies, TV shows and other content to third-party firms like Netflix and others. Viacom is building out its own streaming channel (Paramount+) and other new distribution channels, which are generally showing fast growth. Ultimately, we think the company may be acquired by a major competitor, given its valuable businesses and content library, as well as its bite-sized market cap of about $20 billion.

Its challenges include the steady secular shift away from cable TV subscriptions, which is pressuring advertising and subscription revenues. The pandemic-related reductions in major sporting events are also weighing on VIAC shares. However, ViacomCBS’s extensive reach, strong market position and strategic value to other, much larger media companies, and its low share valuation, make the stock appealing.

The company announced that Hulu will add 14 more ViacomCBS channels, including Comedy Central, MTV and Nickelodeon, to its Hulu live TV streaming service. The agreement renewed carriage for Showtime and CBS broadcast stations that are already on the service. Viacom’s major channels are now on the two largest live TV streaming services (Hulu and YouTubeTV), which have a combined 7.1 million subscribers. Hulu is controlled by Disney, while YouTube is owned by Alphabet. Viacom is working to expand the value of its content, so we see this latest deal as part of that strategy.

VIAC shares slipped about 1% this past week and have about 18% upside to our 43 price target. Valuation is at about 8.4x estimated 2021 EBITDA, which we believe undervalues the company’s impressive leadership and assets. On a price/earnings basis, VIAC shares trade at 8.4x estimated 2021 earnings of $4.32 (unchanged from a week ago). ViacomCBS shares offer a sustainable 2.6% dividend yield and look attractive here. BUY.

Strong Buy – This stock offers an unusually favorable risk/reward trade-off, often one that has been rated as a Buy yet the market has sold aggressively for temporary reasons. We recommend adding to existing positions.
Buy – This stock is worth buying.
Hold – The shares are worth keeping but the risk/return trade-off is not favorable enough for more buying nor unfavorable enough to warrant selling.
Retired – This stock has been removed from the portfolio, primarily for being fully valued. We generally view the company as fundamentally solid with few problems. Investors may choose to hold these shares to minimize portfolio turnover, seek to capture continued upward share price momentum, or other reasons.
Sell – This stock is approaching or has reached our price target, its value has become permanently impaired or changes in its risk or other traits warrant a sale.

The next Cabot Undervalued Stocks Advisor issue will be published on February 3, 2021.

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