Viacom Veers Toward Fall Slowdown

Maybe the summer wasn't so hot at Viacom (VIAB Quote - Cramer on VIAB - Stock Picks) after all.

The New York media giant shocked Wall Street Wednesday by slashing 2003 revenue and earnings estimates, saying the local advertising market isn't improving as quickly as expected. The announcement marks a sharp reversal for Viacom, which just two months ago won plaudits by paying a dividend for the first time ever. Viacom shares dropped more than 5% Wednesday morning before staging a mild recovery.

Coming with a week to go in the third quarter, the warning could put the media industry in a jittery mood, given Viacom's pre-eminent position in radio, television and outdoor advertising. The company is also parent of the CBS television network and operator of the nation's second-largest chain of radio stations.

Radio Daze

Although Viacom didn't specify a particular medium at the root of the shortfall, the announcement calls attention to ongoing difficulties at its Infinity radio operation. After terming the radio division's performance "disappointing," Viacom President Mel Karmazin overhauled the top management of the division. Karmazin has also said he sees no fundamental problems with the radio industry, telling analysts in July, "I absolutely, fully expect" that the weakened radio business will return to its historical growth rates.

Viacom shares were down $1.39 to $38.88. Except for the Spanish-language broadcasters -- perhaps given a boost by the Federal Communications Commission's recent approval of the merger of Univision (UVN Quote - Cramer on UVN - Stock Picks) and Hispanic Broadcasting (HSP Quote - Cramer on HSP - Stock Picks) -- other TV and radio operators were mostly trading lower. Clear Channel (CCU Quote - Cramer on CCU - Stock Picks), the nation's largest operator of radio stations, dropped $1.10 to $39.20.

In its Wednesday warning, Viacom stated, "While the economic recovery has translated into robust national advertising sales growth, the pace of the recovery in local advertising markets going into the fourth quarter is not as rapid as had been anticipated."

Vitality Up and down at Viacom

Instead of the "high single-digit growth," in percentage terms, that Viacom had been forecasting for its 2003 revenue, the company is now predicting "mid-to high-single digit growth." Instead of double-digit growth in operating income, the growth will be in the mid- to high-single digits there as well. Net earnings, before the cumulative effect of a change in accounting principle, is dropping from mid-teen growth to low- to mid-teen growth.

At a Merrill Lynch conference earlier this month, Karmazin said the current tone of the advertising market remains healthy, according to a summary of his statements issued by the brokerage house.

Foreshadowing

In recent weeks, some of the sell-side analysts following Viacom have issued research reports calling attention to the weak local advertising market's effect on the company's bottom line. Local advertising -- ads placed, for example, by local car dealers and other retailers -- plays a major role in the radio market, accounting for 78% of revenue, according to recent statistics from the Radio Advertising Bureau trade group.

On Monday, for example, SoundView Technology analyst Jordan Rohan cut third-quarter estimates for Viacom, citing poor performance at Viacom's Paramount movie studio and "less than inspiring growth" of local TV and radio stations. "We believe Infinity will underperform the radio market in 3Q," wrote Rohan. "Management has ... made a pledge to right the ship. It will take a few quarters before management and format changes can deliver improvement." Rohan has an outperform rating on Viacom and a $52 price target; SoundView hasn't done underwriting for Viacom.

Advertising sales amounted to 46% of Viacom's revenue in the first half of 2003, but Viacom doesn't specify how much of that money comes from local advertisers and how much comes from national advertisers.