Viacom Reports Dull Q3 Earnings But Shares Still Look Cheap

Viacom (NASDAQ:VIA) recently released its Q3 fiscal 2012 earnings and, as expected, the performance of its media networks and movie business declined compared to the same quarter last year. We previously wrote on our expectation from Viacom’s earnings (see Nickelodeon & MTV To Generate The Bulk Of Viacom’s Revenues In Earnings) and much was inline. The movie business was bound to decline as Viacom’s current movies haven’t been able to match up to the exceptional performance of last year. However, this is not a concern since only 10% of Viacom’s value is dependent on its movie business, as per our estimates.

The worrying, but not unexpected, aspect was the decline in media networks revenues as mild growth in affiliate fee was not able to make up for advertising revenue declines due to lower ratings at Nickelodeon and MTV. These two channels contribute significantly to Viacom’s value due to their worldwide demand and notable subscription fees. The U.S. business from these two channels account for more than 20% of Viacom’s value. However, their international presence is huge and MTV alone reaches close to 600 million subscribers across 150 countries through 58 MTV branded channels. ^[1] Similarly, Nickelodeon reaches 330 million households across 110 countries. ^[1] Therefore, the overall value contribution of these two channels is quite high.

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Nevertheless, there is improvement. Viacom noted a sequential improvement and expects ratings to pick up in the future as it invests in a better lineup of programs for Nickelodeon and MTV. Despite the DirecTV blackout, the company is seeing a sequential improvement in ratings in the last quarter of fiscal 2012 as BET Awards compensated for the blackout.

It’s all about media networks for Viacom and the company will need to maintain revenue growth for this business. To do so, it will need to focus on original programming as well as licensing to emerging Internet-based players such as Netflix (NASDAQ:NFLX). There is always the chance of cannibalization of live programming by licensed content, even if the latter is older. Hence, focus should be more on original and live programming as it is affected quite quickly if viewership declines. If live programming is successful, the demand for its licensing in later years will automatically follow.

We are in the process of updating Viacom’s pricing model in light of the recent earnings and will have an update ready soon.

Our current price estimate for Viacom stands at $69.50, implying a premium of close to 40% to the market price.

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1. Viacom’s SEC filings [↩] [↩]