The cable network industry can be difficult to maneuver, considering the high levels of competition and proliferation of hardware and software devices that continue to challenge business models in the sector. However, some players have managed to maintain their success rates via original content programming and targeting niche audiences. Viacom Inc. (VIA, Financial) is one of these companies, and it has shown strong growth ever since its spin-off from CBS Corporation (CBS, Financial). So, let’s see what may have motivated investment guru Jim Simons (Trades, Portfolio) to add another 23% to his 57,000 company shares.
Targeting a Niche Group
As a global media company, Viacom owns a broad portfolio comprised of the cable networks Nickelodeon, MTV, BET, Comedy Central, VH1, Country Music Television and Spike TV, as well as the motion picture production studio Paramount Pictures. However, there is no doubt that Nickelodeon is the star growth driver in the company, as it generates approximately one-third of overall cash flow. With its target niche of tweens (nine to 14 year olds), the network has been fighting to dominate main rival The Walt Disney Company (DIS, Financial)’s historical audience. And so far, results have been positive, due to its organic production of teen stars via original programming. However, the company will have to stay on top of tweens'fickle consumer preferences, in order to outlast competitors like Discovery Communications Inc. (DISCA, Financial) and Hasbro Inc. (HAS, Financial)’s The Hub, which targets tween boys.
Furthermore, MTV has been struggling over the past five years to maintain its ratings, which have declined due to a younger audience spending only short periods of time on the channel. Nevertheless, the strong presence of reality TV shows allows the network to generate strong cash flow margins, as no star actors are involved in reality TV. On another negative note, the filmed entertainment segment is somewhat worrisome. With theatrical releases that have been underperforming, sales have dropped 30% year over year and considering that this sector accounts for 40% of overall revenue, this trend could be detrimental. However, last quarter Viacom posted rating gains across most of its networks, which is bound to boost advertising dollars (60% of the company’s revenue).
Quality Programming to Drive Growth
Although Viacom’s programming quality still falls behind competing networks Time Warner Cable Inc. (TWC, Financial) and News Corporation (NWSA, Financial), the company’s $3 billion investment gives it a competitive advantage over new market entrants. Furthermore, pricing increases from television distributors continue to boost the firm’s margin growth, driving annual revenue growth to 8.60%, due to 9.7% growth in affiliate fees and 4.4% higher advertising for fiscal 2013. For the next five years, revenue is expected to continue climbing at an average annual 4% rate, while the current 10.2% EBITDA growth will continue at a similar pace.
Another enticing aspect of Viacom’s valuation is its earnings per share growth, which has consistently closed at 22.2% growth levels, nearly doubling the industry’s average. The 86.3% returns on capital, as well as 46.1% returns on equity are undoubtedly tempting ratios for investors looking to gain long-term profitability via shareholder returns. Also, with the stock currently trading at an 8% price discount relative to the industry average of 19.2x, this would be a wise time for investors to buy company shares, since the price might go up over the next year. So, despite some negatives on behalf of Paramount Pictures studio, I still feel very bullish about Viacom’s future, due to its rising network ratings and sustainable business model.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
