Business Description:
Operates under 3 segments: TV Entertainment, Cable Networks, and Filmed Entertainment with respectively 42%, 50% and 10% of total revenues in 2020
38% of revenues in 2020 came from Advertising, 36% from affiliate and 24% from content licensing
10% of revenues came from Streaming, that is, 8.5% of TV Entertainment and 13% of Cable Networks
In 2020, they had 30 million global streaming subscriber and expects to reach 65-75 million in 2024
Streaming will be a new reportable business segment in 2021
Stock crashed by 60% in a few weeks after company announced share issuance to raise capital, which triggered a margin call for Archegos Capital
Catalysts:
Big potential for the streaming business, expected to grow by 30% per year till 2024
TV and filmed entertainment pretty stable businesses
Risks:
Streaming business is very competitive with Netflix, Disney+, Amazon Prime, Apple TV+ and others
Streaming business might be a cash flow drain in initial years
Further share dilutions
Cable Networks businesses are in decline
Financial Analysis:
Revenues of $25.2 Billion in FY20 down from $26.9 Billion in FY19
Operating income of $4.13 Billion in FY20, about the same as in FY19
Net loss of GBP 2.31 Billion in FY20 down from $3.17 billion in FY19
Free Cash flow of $1.89 Billion in FY20 vs $826 million for FY19 (down from usual because of one time tax expense)
Balance Sheet
Total assets: $52.6 Billion ; total liabilities: $36.6 Billion; book value: $15.6 Billion
Cash: $2.9 Billion, debts: $19.7 Billion, current assets: $13.7 Billion, current liabilities: $8.2 Billion
Shares outstanding increased by 67% during merger in 2019 and will increase by at least 6% with the new issuance
Valuations:
My personal Biases:
Was interested to look at company last year but missed the opportunity
More bullish on Disney and Netflix businesses
Assumptions for base case:
Streaming segment still considered as part of TV Entertainment and Cable Networks segments
Streaming parts of each of TV Entertainment and Cable Networks to grow by 30% annually till 2025
Non-Streaming parts to remain at 2020 levels
TV Entertainment Revenues to go back to 2019 levels in 2022
Ignore all corporate adjustments in revenues (they are negligible)
TV Entertainment operating margins fall to about 10% from 13% with extra expenses from streaming
Cable Network operating margin remains about 25%
About half consolidated operating income can be converted into FCF
FCF discounted at 15% for 5 years with terminal growth rate of 0%
Use P/FCF as exit multiples for 2025 (range of 5-30 in last 5 years)
Bull case 10% more than in base case and bear case 20% less
15% share dilution in base case, 10% in bull case and 20% in bear case
Conclusion
Overvalued with intrinsic value of $18 billion and current market cap of $27 billion
Expected returns only 4% per year with 21% in base case scenario and a large downside in the worst case scenario
Might be attractive if stock price keeps falling
