Despite Poor Network Ratings and Management Scuffle, We Continue To Have Faith In Viacom

Viacom (NYSE:VIA) will report its Q3 earnings on Thursday, August 4th.  Despite its problems, we continue to believe that the company has strong assets and could revive its business. We think lower advertising rates may be temporary as Viacom recently completed strong upfront ad sales. Change in its international strategy and growing digital content sales could unlock more value. We believe the management scuffle has resulted in market overreaction as the company is still fundamentally, strong considering long term trends and established brands.

Advertising Troubles For Viacom May Be Temporary

Viacom reported a fall of 5% in its domestic ad sales for in the first quarter of 2016. We expect this trend to be visible in Q2 2016 results as well. Ratings for Comedy Central and BET Networks are down by double digits, while those for Nickelodeon are down by 6%.  ((Midyear cable ratings: News soars, Viacom snores, USA TODAY, June 13,2016))  Only VH1 seems to be performing well, with a 14% increase compared to last year due to the popularity of the shows Love and Hip-Hop and Basketball Wives. Nevertheless, we expect these trends to be temporary, as:

• There has been a change in the management and strategy of MTV ^[1] and we believe this could have a positive impact going forward.
• Strong upfront season sales with 10% increase in volume and 8% increase in prices, provide a silver lining. Viacom became the first network to wrap up its upfront business. The up-front season was boosted by the deal with Snapchat. As per the deal, both companies keep a portion of the advertising money on Viacom’s channels on Snapchat. The availability of Viacom Vantage enabled the company to secure 40 up front deals. ^[2]

We expect Viacom to derive majority of its advertising revenues from International & Other segment in the long run, which accounts for 65% of its valuation according to our estimates. This will be driven by international expansion, a shift to digital platforms and the wide appeal of Viacom channels.

                     [trefis forecast ticker = “VIA” driver=”1939”]

Why The Market May Have Overreacted To Viacom Management Problems?

The price to earnings ration (P/E) for for Viacom is extremely low acompared to its peers. At the same time, Viacom seems to be fundamentally strong with stable EPS growth and higher earnings in comparison to the book value as compared to its competitors.

Potential Risk

The financial position of Viacom may be deteriorating. The long term debt of the company has risen by 73% to $12.7 billion over the past 5 years. Long-term debt as a % of its total liabilities has increased by 20% during the same time period, while the cash flow from operations has remained more or less the same. The burden of the same has to be borne by shareholders as in 2015, the company was only able to repurchase $1.5 billion worth of stock which was the lowest since 2011. The majority of the cash was diverted towards payment of debt. We expect the revival in the business of Viacom which should improve its cash position.

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1. “How MTV Is Trying to Reinvent Itself to Combat Sinking Ratings and Disinterested Teens”, Billboard, July 17, 2016 [↩]
2. Viacom Wraps Upfront Negotiations Despite Its Board of Directors’ Power Struggle Data, Snapchat interest helped drive 8% CPM increases By Jason Lynch, Adweek, June 17,2016 [↩]