Back to Growth
During this quarter, revenue increased by 3.7% year-over-year despite the currency headwind of about 2%. Adjusted EPS beat expectations and grew $0.02 to $1.20. Adjusted operating income stayed stable due to upcoming original programming launches and investments in growth initiatives.
The 6% revenue growth for the domestic advertising business is remarkable. It's the first time in five years the company has reported growth in this segment. And management expects this trend to continue for the rest of the year. Also, Paramount, Viacom's film entertainment segment, is on track to generate a profit this year.
The New Dynamics of Streaming Video
From a strategic perspective, a new dynamic is developing as well with the company is putting its efforts into growing a profitable Direct-to-Consumer offering. The goal is to offset the secular decline of the legacy cable and broadcast businesses.
The domestic affiliate revenue declined 1% due to the lower number of subscribers. But the company managed to increase its revenue from its "Media Networks" segment thanks to higher advertising revenue. Disney (DIS - Get Report) reported a similar pattern a few days ago. The growth of Viacom's streaming video service Pluto TV contributed to the advertising revenue growth.
But there's another important aspect to consider. While Viacom is growing its streaming business, Paramount will keep on providing content to its competitors Netflix (NFLX - Get Report) , Hulu (now owned by Disney), Apple (AAPL - Get Report) and AT&T's (T - Get Report) Warner Media.
The dynamics will be interesting to follow. These big players fight for content to grow their viewer base and gain scale. By providing content, Viacom profits from the success of its competitors. But Viacom also needs its streaming video service to stay competitive to grow its top and bottom lines.
Attractive Valuation and Short-Term Opportunity
Given the valuation and the inflection point, I would consider buying shares. And with the specific situation with CBS, I also see a short-term opportunity that consists of selling covered at-the-money puts. The potential outcomes are:
- If the option is exercised, with or without a merger with CBS, you would acquire a business at a price that is cheap, while pocketing the option premium.
- If the merger with CBS is announced in the short term at a higher price, you could buy back your options and make a quick profit. And the annualized return would be attractive.
The main risk of this strategy is to miss the upside potential. CBS could make an attractive offer shortly before the option expires, which would reduce the annualized return. Or the stock price could increase before the option expires. But even with these scenarios, you're still getting the option premium.
Viacom's fiscal Q3 earnings confirmed the business is turning around. Despite these encouraging results, the market still values the company cheaply. The rumors of a merger with CBS in the short term bring uncertainty, but they also create a short-term opportunity. Selling at-the-money puts will provide the potential for a quick profit while still offering exposure to the attractive long-term investment proposition.