Viacom Finally Gives Investors a Reason to Buy the Stock

Viacom showed modest improvements in advertising sales and affiliate fees, giving investors a reason to buy the stock, which is trading near at its cheapest level since 2009.
By Leon Lazaroff ,

Viacom (VIAB) - Get Report Chairman Sumner Redstone says he still has confidence in CEO Philippe Dauman to transition the TV and film company into the digital world. And for the moment at least, so do investors.

Although the owner of MTV, Nickelodeon and Comedy Central reported revenue and net income that missed analyst forecasts, Viacom shares were gaining nearly 4% to $51.30 by midmorning Thursday, trimming the stock's 2015 decline to 32%.

The bump in stock price was due to a smaller-than-expected 7% drop in ad sales, while revenue from pay-TV operators that carry Viacom networks jumped 15%, exceeding expectations.

For Dauman, signs of improvement are likely to mitigate calls for the company to make bold changes, such as replacing top management. They may also strengthen his argument that viewing of Viacom's content wasn't being accurately measured by Nielsen.

The results, said John Janedis, a media analyst at Jefferies, were "the result of an improvement in ratings and greater traction in non-Nielsen dependent sales." For Viacom and its mostly frustrated investors, those are developments were worth cheering.

Part of Viacom's charm for investors is that the stock is trading at 8.2 times earnings, near its cheapest level since March 2009. In August, shortly after Disney (DIS) - Get Report CEO Bob Iger signaled a decline in subscribers at ESPN, the most popular cable-TV network, Viacom shares traded as low as 6.7 times earnings.

The problem dogging Viacom and its largest networks has been the criticism that it has too little "must-see" television.

Yes, Trevor Noah, the new host of "The Daily Show," is attracting more, younger viewers than Jon Stewart did during his final months at the politically charged program, but he's yet to generate the buzz of one-time Comedy Central personality John Oliver, who left Viacom two years ago to launch his own show at rival Time Warner's (TWX) HBO.

And while Dauman sought to emphasize that Viacom is seeing better viewership numbers, asserting that six of it top 10 networks are exhibiting audience growth amid improved domestic advertising spending, the audience at Comedy Central has tumbled more than 30% during the new TV season among viewers ages 18 to 49, according to Nielsen. 

All in all, Viacom reported net income of $884 million, a total boosted by a one-time tax benefit. Without the tax benefit, profit for the the September quarter was $1.54 a share, missing analysts' average forecast of $1.55. Sales dropped 5% compared to the same period year earlier to $3.79 billion, also falling short of the $3.88 billion average estimate. The strong dollar took a toll on international sales, the company said.

Viacom's results were particularly hard-hit by a weak showing at its movie business, Paramount Studios where its recent slate of Mission Impossible - Rogue Nation and Terminator: Genisys matched up poorly with last year's Teenage Mutant Ninja Turtles and Transformers: Age
of Extinction.

Total operating income at Paramount was a mere $122 million, its lowest showing since 2009. That's particularly significant given that revenue from Viacom's networks has been slipping for more than a year, said Bernstein media analyst Todd Juenger.

"[Paramount] didn't used to matter much in the context of total Viacom results, but it matters more as Paramount has become a bigger part of the Viacom argument," Juenger wrote in an investor note. "Hard to pound the table for Paramount being worth $4 billion to $5 billion in a sum-of-the-parts when it is only delivering less than $150 million in [operating income]."

Paramount's third-quarter movie slate was weak, and it had the challenging comparison of last year's Transformers: Age of Extinction. Revenue of $1.03 billion was a full 24% lower than in the same period a year ago.

But if there is a bright spot at Viacom it's that its networks are beginning to show signs of growth. Revenue there was rising 5% to $2.79 billion.

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