The Steep Fall In Viacom’s Stock Post Earnings Is Unwarranted

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Viacom’s (NASDAQ:VIA) June quarter earnings were in line with street estimates but revenues were weaker amid lower advertising revenues. There have been renewed concerns of cord cutting this past week after Dish Network reported a higher than expected subscriber loss for the quarter and Disney lowered its profit guidance for cable networks. Viacom’s stock has taken a massive hit this week. However, we believe that this steep fall is unwarranted as the fall in advertising income wasn’t that dramatic or unexpected. In fact, a 9% drop in advertising income against a 20% drop for C3 ratings at Viacom’s networks for the quarter is not that bad. This confirms the company’s stand on generating more advertising revenues that are not dependent on Nielsen ratings.

  • Trefis has a $72 price estimate for Viacom’s shares, translating into a $28 billion market cap. This is roughly 65% ahead of the market price of around $44 seen over the week.
  • We estimate the company’s 2015 revenues to be a little under $14 billion for an earnings per share of $5.74, compared to a consensus of $5.88 according to Reuters.

See our complete analysis for Viacom

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Media Landscape Is Changing

The U.S. media landscape is changing, with the rapid growth of alternative video platforms such as Netflix. This has produced a decline in traditional television viewership, which has caused massive ratings decreases for many networks. Viacom’s cable networks were hit hard in the June quarter. Nickelodeon was down 30% among kids 2 to 11, Comedy Central fell 23% among adults 18-49 and MTV dropped 22% in the 12-34 demographics. [1] Networks such as MTV and Nickelodeon primarily target the younger generation, which is rapidly shifting to digital platforms. However, Viacom stated that Nielsen ratings do not adequately reflect its viewership, given a shift to digital platforms. Accordingly, the company has been expanding its next generation advertising capabilities with various initiatives such as Viacom Vantage. [2] Moreover, even the traditional ratings will have a favorable comparison going forward, once the year-to-year compasion hits the first quarter of the downturn in Viacom’s ratings last summer. Accordingly, our $72 price estimate reflects a growth in the cable networks division, albeit at a slower pace. This growth will not only come from higher rates but also result from the cable networks’ focus on original programming. This will push the demand and at the same time generate higher revenues from licensing of new shows. Furthermore, international markets will see continued growth both in subscription and advertising revenues as Viacom expands its reach. The company acquired Channel 5 in U.K. last year and recently acquired a 50% stake in Prism TV for 5 regional language Indian networks. Having said that, we expect the growth rate to be in low-single-digits across Viacom’s portfolio.

Pay-TV Is Not Dying Right Away

The investor concern over ratings decline and cord cutting is understandable. However, one can’t write off pay-TV completely. There is a shift in viewer habits and the demand for streaming services is indeed on a rise.  But that does not mean that there are no takers for traditional television. Networks such as Nickelodeon and MTV still have around 90% penetration among the U.S. pay-TV households. Even if we were to estimate a continuous decline in penetration levels to 70% and advertising levels to drop in mid-single digits for the next 7 years, Viacom will still be worth $55, according to our estimates.

Looking at the overall media landscape, we maintain our view that there is a place for both streaming and traditional television to co-exist. A shift in audience from traditional television to digital platforms does result in lower ratings, which in turn weighs on advertising revenues.  But if there are more avenues to distribute and stream the content, media companies will be able to generate more revenues in the form of content licensing fees. Eventually the viewership across various platforms including digital will be measured, and any decline on the traditional television front should be offset by the growth in other distribution avenues and content licensing. For media networks, it is of immense importance that they focus on original programming that can attract more viewers, because licensing to digital platforms is often based on individual shows rather than a complete network bundle. Here also, Viacom in its recent earnings call stated that it will now be focusing more on original programming rather than syndication, which is losing demand. [2]

We currently estimate Viacom’s media networks revenues to be around $9.60 billion in calendar year 2015. An estimated EBITDA margin of 41% will translate into EBITDA of a little under $4 billion, representing around 90% of the company-wide EBITDA.

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Notes:
  1. Drawn and Quartered: Ongoing Ratings Slide Will Take a Bite Out of Cable Earnings, Advertising Age, July 13, 2015 []
  2. Viacom (VIA) Earnings Report: Q3 2015 Conference Call Transcript, The Street, Aug 6, 2015 [] []