What Can Move Viacom’s Stock Higher?

Viacom (NASDAQ:VIA) has been struggling with lower ratings at its cable networks, including Nickelodeon and MTV. This has put pressure on revenues and the company is now focused on bringing more programming in the upcoming television season. Over the next few years, we expect revenues from cable networks to grow in low-single-digits. However, there still remains uncertainty around the ratings environment, which suggests room for stock price movement depending on how the audience receives the programming in the next couple of years. Specifically, we believe that new programming could catalyze Viacom’s stock price movement, particularly if it is clubbed with Viacom’s international expansion and changes in Nielsen’s ratings measurement to include alternative video platforms.

See our complete analysis for Viacom

Cable Networks Ratings Grow By 10% (+10% Upside To Stock Price)

Viacom has been looking for a rebound in ratings, but its recent programming slate hasn’t seen the expected success. The ratings woes began in 2011, peaked in 2012 and saw a slight rebound in 2013 before it plunged again in 2014. MTV saw a 5% drop in average primetime viewership in 18-49 demographic in 2014 while Nickelodeon’s ratings plunged 13% in key demos. ^[1] While the decline in ratings was widespread due to a change in viewing habits with the rise of alternative video platforms, the pace was higher for Viacom’s networks due to lack of appeal of its programming slate. Also, networks such as MTV or VH1 primarily target the younger generation, which is rapidly shifting to digital platforms. So far, Nielsen doesn’t account for ratings on digital platforms and this weighed on the media networks revenues. Overall domestic advertising revenues for MTV, Nickelodeon and VH1 declined from $1.65 billion in 2010 to $1.40 billion in 2014, according to our estimates. Looking at other advertising revenues, they grew $3.0 billion to $3.6 billion during the same period, primarily due to international expansion of its media networks.

Having said this, it is possible that we are underestimating Viacom’s competitiveness in key demographics. The company is now focused on bringing in more programming and new shows to attract more viewers. MTV is trying to widen its audience base with shows such as Eye Candy and Finding Carter. Nickelodeon has announced new programming for 2015-16 season, including Make it Pop, Talia’s Kitchen and Mutt & Stuff. It also plans to put popular character SpongeBob SquarePants in a Broadway musical and to extend its Teenage Mutant Ninja Turtles franchise to attract more viewers. ^[2] Nevertheless, a 10% viewership growth annually for Viacom’s media networks could add incremental advertising revenues of close to $1.20 billion over the next few years, adding 10% to our price estimate and more than 10% to our EPS for 2020.

Viacom’s Cable Networks Reach 850 Million Household Internationally (+10% Upside  To Stock Price)

Viacom has been expanding internationally and currently reaches more than 700 million households in 165 countries. ^[3] The company has been investing in international markets to consolidate its media networks. In 2013, it acquired a 51% stake in MTV Italia from Telecom Italia Media. Similarly, it also moved MTV Brazil and MTV Russia to owned-and-operated models. In Brazil, MTV moved from the 30th to 16th spot in its core demographic within six months of re-launch. Last year, Viacom acquired Channel 5 in the U.K. for $757 million. Channel 5 is the only public service broadcaster in the U.K. to post viewership growth in recent years. International expansion has helped Viacom over the past few years. Other subscription revenue, which includes Viacom’s international subscription revenues and Viacom’s other cable networks such as Comedy Central and SPIKE, grew from $2.0 billion to an estimated $3.40 billion between 2010 and 2014. Viacom’s reach also expanded from a little over 600 million households to 700 million households during the same period. We estimate that other networks and international subscription could garner as much as $6 billion to $7 billion in annual revenues if it continues to expand at a similar pace and reach more than 850 million households in the coming years.

We still take a conservative view in our pricing model, owing to an expected increase in competition in the media industry and growth of alternative video platforms. Accordingly, we assume other subscription revenues will be around $5 billion by 2021. However, given the demographics Viacom’s media networks target, the international expansion may continue at the same pace and its revenues could improve. In such a scenario, there is a good chance of adding incremental revenues of $1 billion over what we currently forecast. This will add 10% to the company’s value.

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1. The Ever-Updated TV Upfront Chart, AdAge, Mar 10, 2015 [↩]
2. Nickelodeon’s Press Release, Feb 25, 2015 [↩]
3. Viacom’s SEC Filings [↩]