Viacom’s new common and preferred stock offerings were a shock to the widely held VIAC Class B shares after a strong recent run-up.
While we cannot fault management for opportunistically taking advantage of the VIAC bull run to access affordable incremental capital to invest in its new streaming services, the near-term devastating impact on VIAC shares is sobering. Even with the selloff, VIAC shares remain relatively underpriced and among the best stocks to buy now, according to many analysts.
The Series A Preferred stock converts into Class B shares on April 1, 2024. The VIAC Class B shares, which had been on a bull run since late 2019 as the company prepared to relaunch its video streaming service as Paramount+, were hit hard by the new stock offerings as the market anticipated the dilution.
It also did not help that VIAC priced the Class B offering at $85, well below the then current market price over $100. VIAC priced the new offerings on March 23 and VIAC shares fell a record 23% on March 24. VIAC shares are down 38% from a peak at $100.34 on March 22 and fell 7% intraday on March 26, the closing date for the new offerings.
It is hard to fault management’s opportunistic decision to take advantage of the recent bull run in VIAC shares which even with this week’s devastating selloff remain well above the S&P on near term, year-to date and one-year charts.
However, the sharp break in the recent positive momentum could cause VIAC shares to sell off further. On a two year chart, VIAC shares are now 12 percentage points below the S&P. Including over-allotments, the Class B common share offering represents about 4% dilution to the VIAC base. Combined the share offerings represent about 6% dilution. VIAC relaunched its video streaming service as Paramount+ on March 4.
The new Paramount+ has a $4.99 advertising-supported tier and $9.99 premium ad-free tier. While all the Hollywood subscription video services, Paramount+ included, are focused on promoting original episodic television and movie content on a base of library content, Paramount+ will also promote CBS’s traditional strengths in sports programing (including the NFL, the most popular U.S. sport), news, and reality television.
VIAC plans to increase its streaming content investments from $1 billion in 2020 to $5 billion in 2024. Hence the need to access affordable incremental capital through its March stock offerings. Its total content investment in 2020 was $15 billion.
Management expects VIAC’s global streaming revenue to grow at a 30% compound annual rate over the next four years, to more than $7 billion in 2024. The company expects global streaming subscribers to grow from 30 million in 2020 to 65-70 million in 2024. It also looks for its advertising supported Pluto TV streaming video services to grow from 43 million monthly active users to 100-120 million in 2024.
On March 18, VIAC renewed its rights agreement with the NFL through 2033 along with the rest of the NFL’s traditional network distributors and new digital distributor Amazon Prime Video. While the press reported rumors of $1 billion per year rights payments, the NFL agreement was a must-have for VIAC.
The company was able to lock up NFL rights for games on its flagship CBS broadcast network as well as extend its rights to digital distribution on Paramount+. Sports provides an important differentiator for Paramount+ in relation to streaming video behemoth Netflix as well as some other smaller competitors.
Although the NFL ratings fell 7% year-over-year in the 2020-2021 season, it remains critical content for VIAC. Whether that criticality will remain the same, grow or diminish over the next 12 years is anyone’s guess. Our 2021 EPS estimate is $4.21 and our 2022 forecast is $4.48.
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This risk is partially mitigated by advertising’s eroding share of revenue as management has made a multiyear effort to diversify its asset base. Advertising was 33% of revenue in 2020, down from 37% in 2019 and 40% in 2018.
BUY on Bio-Techne Corp. (NGS: TECH) with a price target of $440, raised from $370. We are encouraged by the company’s strong performance in fiscal 2Q21, which included solid revenue and EPS growth – reflecting continued recovery from recent pandemic-related disruptions in the academic research market. We see robust customer demand and continued momentum for Bio-Techne in the second half of fiscal 2021.
Bio-Techne provides solutions to assist in the development of tests, therapeutics and vaccines to combat the coronavirus. It also remains well positioned to benefit from macro trends in the biotech industry, including increased spending on the development of new drugs and genomics-based diagnostics.
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Bio-Techne is shipping as much product out the door as it can manufacture. It is supplying instruments, reagents, proteins, and supplies to developers of COVID-19 vaccines and of biologics drugs. In fiscal 2Q, its Diagnostics and Genomics segment showed stronger profitability on higher volume.
Broader adoption of the ExoDx Prostate (EPI) test, along with a favorable reimbursement coverage decision by Humana, is driving sales of the test. With its balance sheet strength and higher operating cash flow, the company is well positioned to make acquisitions that will expand its portfolio and add new growth drivers.
In early March, Bio-Techne agreed to acquire Asuragen, an oncology diagnostics company, for $215 million in cash, plus future contingent considerations of up to $105 million.
On February 2, the company delivered strong 2Q21 results as adjusted EPS rose 50% to $1.62, beating the consensus estimate by $0.25. GAAP net income was $46.3 million. The prior-year results included a nonrecurring gain of $121 million from the sale of the ChemoCentryx investment. Revenue rose to $224.3 million (+21% reported; +19% organic).
By segment, the Protein Sciences segment posted sales of $172.2 million. The segment margin was 46.6%, up 350 basis points, driven by volume leverage and improved cost management. The growth in segment sales reflected the reopening of academic labs, along with strong demand from biopharma customers for custom proteins, antibodies and reagents.
Sales in the custom reagent category grew more than 60%. Developers of cell and gene therapies also increased purchases of cytokines, growth factors, proteins, and reagents meeting Good Manufacturing Practices (GMP) standards. This demand drove a near-doubling of sales for the SimpleFlex ELLA platform – a small-footprint system for analyzing immunoassays.
The Diagnostics and Genomics segment posted fiscal 2Q sales of $52.5 million (+19% on an organic basis). The segment margin was 15.5%, up from 2.2% a year earlier.
Key drivers in this segment were increased demand for ACD tissue pathology products, the micro RNAscope instrument, and the Exosome ExoDx Prostate (EPI) test. We expect expansion of the EPI test platform for use in the detection of other cancers. Next in line for commercialization is the ExoTrue assay, which helps clinicians assess the likelihood of kidney implant rejection.
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Management does not provide guidance. However, on the fiscal 2Q21 call, it said that it was pleased with the 15% organic growth posted in fiscal 1H21 and noted that year-over-year comparisons would become easier in 2H21. Looking ahead, we expect higher spending on the launch of new products, sales force expansion, and the development of pipeline products.
While this spending will pressure operating margins, we expect it to be more than offset by volume leverage from strong sales growth. Based on these factors, we are raising our adjusted EPS estimates to $6.10 from $5.78 for FY21 and to $7.00 from $6.65 for FY22.
The company faces integration risk as it makes acquisitions to expand its product portfolio. Acquired products may also require additional investment before reaching the market. In addition, the company faces regulatory risks related to product approval from the U.S. FDA and government agencies in overseas markets.
Its customers include companies in the pharmaceutical and biotech industries as well as academic research institutions.
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However, we believe the premium is warranted given the company’s solid growth drivers, which include new research tools and COVID-19 test assays. We also see the company making tuck-in acquisitions to expand its product portfolio and geographic reach.
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