Some stocks deserve cheap valuations. Issues like shrinking demand, compressing margins, or new, formidable competitive entrants and industry disruption can all rightfully weigh on a company's price tag.
Still, there are value stocks with prospects much brighter than their price-to-earnings ratios may indicate, which actually provide compelling upside. Let's explore two primary examples.
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1. ViacomCBS transitions to streaming
Today, ViacomCBS (VIAB) (PARA 1.48%) trades for roughly 8.6 times next year's earnings. Its precarious niche within cable television, while the world rapidly shifts to streaming, is a primary reason for this low valuation. Fortunately for investors, the company is finding its mojo in the streaming landscape.
In its most recent quarter, ViacomCBS reported a 57% year-over-year spike in monthly active users (MAUs) to 28.4 million in its free streaming service, Pluto TV. Global MAUs surpassed 36 million. This growth doesn't generate subscription revenue for the company but still is important for two primary reasons.
First, ViacomCBS generates meaningful advertising revenue from Pluto. While the service barely eclipsed $1 million in daily advertising revenue last year, it already has enjoyed multiple $3 million days in 2020. On the most recent earnings call, CEO Robert Bakish made it a point to highlight how positive of a revenue inflection Pluto TV has enjoyed this year and reaffirmed the free service's end-of-year subscriber targets.
Beyond generating advertising revenue, the product also allows ViacomCBS to market its thriving paid direct-to-consumer (DTC) services, CBS All Access and SHOWTIME. ViacomCBS' paid subscribers rose 72% year over year to 17.9 million in the third quarter. The outperformance prompted Bakish to raise ViacomCBS' year-end subscriber target for the second consecutive quarter.
The entertainment company is now expecting over 19 million paid direct-to-consumer subscribers by year-end versus an expectation of 16 million just two quarters ago. This success is happening before CBS All Access will relaunch in 2021 as "Paramount+," which will integrate all of ViacomCBS' sports and news assets (like Champions League and the NFL) to further differentiate the product.
Clearly, ViacomCBS' dive into streaming is going well, and that should be great news for the stock going forward.
2. CVS is standing its ground
CVS Health (CVS 1.15%) has long suffered from investor fear that Amazon's entrance into prescription delivery would severely damage its business. This is perhaps the primary driver of its valuation of 9.3 times 2021 earnings.
CVS, however, is implementing strategic moves to combat Amazon's competitive threat. The company is actively transforming its store footprint into what it calls "HealthHUBs." These new stores will serve as medical service centers for consumers needing any routine test done. Blood tests, physicals, and so much more will be offered at the HealthHUBs going forward. This updated store model early on has already contributed to a meaningful boost in store margins and sales.
Additionally, CVS is quickly building out its remote-care business, which has enjoyed a 25% compounded annual growth rate since 2018. While Amazon can certainly emulate CVS' pharmacy service with more convenient delivery, it can't match the growing number of in-person and remote health services that CVS is offering. This reality builds somewhat of a competitive moat that's not being appreciated by others.
Beyond the HealthHUBs, CVS' acquisition and integration of Aetna also deepens its value proposition and competitive standing. Aetna, a pharmacy benefits manager and insurance carrier, allows CVS to vertically integrate script discounts and benefits into its business model in a profitable way. Amazon's recently announced dive into prescription discounting makes this paramount to CVS' ability to compete.
With current CVS CEO Larry Merlo stepping down, a former Aetna veteran Karen Lynch will be taking over to power this company's success going forward. Lynch is taking over amid CVS' aggressive upward revenue and cash flow revisions, making now an ideal time for a transition.
Say yes to CBS and CVS
Many value stocks are cheap for great reasons, but these two look to be compelling opportunities. Both are making the right decisions to transform their businesses and are already realizing meaningful success in doing so. Go with ViacomCBS and CVS, two value stocks that actually provide good investor value.
