Viacom’s Studio Business Bolstered By The Success Of Its Movies In 2014

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2014 was good year for Viacom‘s (NASDAQ:VIA) studio business, Paramount Pictures, which has a market share of 10% in the U.S. The movie business benefited from the success of Transformers: Age of Extinction, Interstellar and Teenage Mutant Ninja Turtles. Globally, the studio raked close to $3 billion in 2014. Looking at the fiscal 2014 (fiscal years end with September), the studio’s theatrical revenues stood at $1.21 billion, down 2% over the prior year period. This decline reflects lower carryover revenues, excluding which, theatrical revenues were up by $25 million. [1] We wonder if Paramount Pictures can continue to see success of its movies in the coming years. While the studio has had many popular movie titles, the performance of movies can be erratic.  It largely depends on the audience and box office response, which can be fickle and hard to anticipate. Moreover, it competes with some bigger studios, such as Universal Pictures and Warner Bros. On that note, we discuss below the studio operations in 2014 and our estimates for the coming years.

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A Decline In Studio Revenues Amid Lower Home Entertainment Sales

The studio business contributes less than 5% to Viacom’s value, according to our estimates. In fiscal 2014, it accounted for 27% of overall revenues and 5% to the company’s operating income. However, historically the contribution in earnings has been low due to high marketing costs associated with the business. Transformers: Age of Extinction, Teenage Mutant Ninja Turtles and Interstellar drove Viacom’s success at the box-office this year. These three movies have grossed around $1.75 billion at the global box-office while the production budget of these movies combined was $500 million. It must be noted that Interstellar was distributed by Paramount only in the U.S., while Warner Bros. distributed it in the international markets. Paramount also benefited from its other releases including Noah and Hercules. The success of these movies at the box-office will also aid other studio revenues, such as the revenues earned by via pay-per-view, video-on-demand and pay-TV mediums.

Looking at the overall studio’s revenues, the figure stood at $3.73 billion, down 13% as compared to the prior year period. The studio revenues include box-office revenues, home entertainment and studio’s television and movie distribution revenues. The overall revenue decline was primarily due to lower home entertainment revenues, given the number and mix of titles released during the year. The segment operating income was $205 million as compared to $234 million in the prior year period. [1]

Paramount had a good run at the box-office in 2014 and it has a solid lineup for the coming months, when the studio will reap the benefits from Terminator: Genisys and Mission Impossible 5. We estimate the studio revenues to be north of $4.50 billion and an estimated EBITDA margin of 8% for Viacom’s studio business will translate into EBITDA of over $360 million by the end of our forecast period, representing close to 6% of the company’s overall EBITDA. It must be noted that any change to our estimate will have a little impact on Viacom’s stock price as the contribution of studio business to the company’s overall value is very low.

For calendar year 2015, we estimate Viacom’s overall revenues of around $14.50 billion and EPS of $6.29, which is in line with the market consensus of $5.84-$6.70, compiled by Thomson Reuters. We maintain a $91 price estimate for Viacom’s shares, which is more than 20% ahead of the current market price of $73.

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Notes:
  1. Viacom’s SEC Filings [] []