Distribution Pact With AT&T Should Dispel Some Concerns About Viacom’s Future

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Viacom (NASDAQ:VIA) recently inked a content deal with Hulu, along with a distribution pact with AT&T, which should alleviate some concerns surrounding Viacom’s future prospects. Of late, there have been concerns that some pay-TV distributors could drop Viacom’s programming to reduce bundle costs. Viacom’s programming has been struggling with lower ratings, and a shift in advertising dollars from television to digital has put pressure on advertising revenue growth. The rise of digital video platforms is further adding to these woes, as more people are embracing it as an alternative option for video entertainment. This has resulted in lower viewership for traditional television, and Viacom – along with other media companies – has felt the effect. While there still remains some uncertainty surrounding the ratings environment, the company’s recent deal with Hulu affirms that there are other avenues to offset some of the decline in advertising revenues, subject to the demand for such programming. 

Viacom’s stock has plunged close to 40% so far this year amid continued uncertainty pertaining to future growth. The ratings decline at Viacom has been steeper than peers such as Fox, Disney and Time Warner’s cable networks. This can be attributed to multiple factors, including the target demographics of Viacom’s networks and a lack of big investments in original programming (see full story – How Viacom’s Share Repurchase Strategy Fell Flat).

On the brighter side, the magnitude of the fall in Viacom’s advertising income has been lower than the ratings decline. For instance, Viacom’s media networks have seen ratings fall over 20% for the past two quarters, while the decline in advertising has been in the high-single-digits. This suggests that not all cable programming is Nielsen-dependent, and many marketers still prefer television as a medium to reach wide audience. This is something that Viacom has long been voicing.

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However, investors have their own concerns. Given such fall in viewership, and the availability of competing programming (kids, music and comedy) on digital platforms, there are concerns that some pay-TV operators could decide to drop Viacom’s programming. That would be a problem for Viacom, but the recent distribution pact with AT&T demonstrates that it is still fairly unlikely to occur. Even if it were to happen, it would likely be limited to operators such as Dish Network – which wants to make its bundles cheaper, with or without programming from some key media companies (also see – What Happens If Dish Decides To Drop Viacom?).

Despite the concerns about the ratings environment and uncertainties over Viacom’s distribution agreement with Dish, we believe there is a potential upside to Viacom’s stock from the current levels. Despite the shift in viewer habits and rising demand for streaming services, there is still demand for traditional television. We maintain our view that there will be a place for both to co-exist in the foreseeable future. And Viacom’s networks such as Nickelodeon and MTV still have around 90% penetration among 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 would still be worth $55, according to our estimates. The recent pact with AT&T should provide some stability to Viacom’s stock price. Going forward, if Viacom is able to ink a distribution pact with Dish, it would provide a significant boost to the company, in our view.

  • Trefis has a $72 price estimate for Viacom’s shares, translating into a $29 billion market cap. This is much higher than the market price of around $45 but in line with street estimates, as complied by the Wall Street Journal.
  • We estimate the company’s 2015 revenues to be around $14 billion and 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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