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Viacom: Cheapest Yet Attractive Stock On The Block

 May 04, 2012 02:28 PM

(By Mani) Media giant Viacom Inc. (NASDAQ:VIAB) is cheapest and attractive stock in the industry despite headwinds from Nickelodeon ratings, as digital distribution, improved efficiency and capital returns should drive 2012 earnings per share growth of about 18 percent.

The company's shares trade about 11.5 times its calendar 2012 earnings estimate, and its price/earnings to growth ratio of about 0.6 is amongst most attractive in the peer group.

A number of factors should set Viacom up well for fiscal 2013 including continued growth in international (new channels such as Paramount and Comedy Central) and improved efficiency should drive topline and margins.

Continued affiliate fee growth in the 10 percent range, new Teenage Mutant Ninja Turtles TV show related merchandising opportunities should also bodes well for the company, which runs popular channels such as MTV, Nickelodeon, BET, and Comedy Central.

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However, a sudden dip in the ratings of Nickelodeon is causing problems for Viacom. Since the fourth quarter of last year, ratings of Nickelodeon saw double-digit declines, triggering a debate whether streaming services such as Netflix (NASDAQ:NFLX) is hurting the channel.

"Nick's ratings woes continue to present an estimated ~400bps headwind on domestic advertising growth. Nick rating will have "lapped" and we expect another strong upfront performance (CPMs up ~mid to high single digits)," RBC Capital Markets analyst David Bank wrote in a note to clients.

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The analyst said there is good reason to expect ratings to stabilize once the sudden ratings drop laps itself in mid-September and don't believe there is a secular issue at Nickelodeon.

However, the channel's woes doesn't seem to impact Viacom's earnings as the company reported 56 percent rise in its second-quarter profit, driven by higher affiliate fees and ad revenues, as well as lower distribution costs. Net earnings attributable to the company increased to $585 million or $1.07 per share in the second quarter, up from $376 million or 63 cents per share reported last year.

Excluding items, the company's earnings of 98 cents topped Street view of 89 cents a share. However, the company's revenue missed estimates despite rising 2 percent from last year to $3.33 billion.

The results also reflect the company's $10 billion stock repurchase program, which returned $700 million in equity to shareholders in the quarter. As of May 2, Viacom had $5.90 billion remaining in the repurchase program. Analyst Bank expects Viacom to repurchase about $5.4 billion of stock over next 18-24 months, representing about 20 percent of the current market cap.



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