Viacom (VIAB, Financial) fell from last week’s closing price of $57 a share to $44.10 a share for this week’s close. Media stocks in general were clobbered this week. Disney was the main catalyst as it didn’t meet expectations when it reported earnings on Tuesday, Aug. 4. The Wall Street narrative is that old media companies like Disney, Viacom, Time Warner, CBS and Fox are all being hurt as consumers shift to Netflix. Wells Fargo also downgraded the stock today. You can see which Gurus own VIAB here.
Let’s take a closer look at Viacom.
Company
Viacom is separated into two segments: Media Networks and Filmed Entertainment. Their audience spans over 180 countries. The media networks include Nickelodeon®, COMEDY CENTRAL®, MTV®, VH1®, SPIKE®, BET®, CMT®, TV Land®, Nick at Nite®, Nick Jr.®, Channel 5® (UK), Logo®, Nicktoons®, TeenNick® and Paramount Channel™ and reach a cumulative 3.4 billion television subscribers worldwide. Paramount Pictures® represents the filmed entertainment. Some of its most well-known franchises include Transformers, Star Trek, Spongebob Squarepants and South Park.
Recent Financial Trends
Long-term revenue trend:
Long-term net income trend
Financial Ratios TTM (Per GuruFocus)
- PE Ratio of 11.03
- Price to FCF of 8.36
- EV / EBIT of 9.82
Was the Sell-off Justified?
(From company Q3FY15 10Q)
The Media Networks segment generates most of the company’s revenues and earnings. For the quarter ended June 30, adjusted operating income was down 1%. For the nine months ended June 30, adjusted operating income was down 2%. For the quarter, you’ll notice that advertising revenue went down but was offset by SG&A cuts.
The Filmed Entertainment segment was down 13% for the quarter ended June 30 and down 38% for the nine months ended June 30. As you see, this segment’s effect on the bottom line is dwarfed by the Media Network's influence as Filmed Entertainment only accounts for 15% of this quarter’s revenue. Further analysis shows that this segment had a tough comparison to last year with Transformers: the Age of Distinction being in third quarter of fiscal year 2014. Paramount had no blockbuster titles in third quarter 2015. Instead, Mission Impossible and Terminator were released in fourth quarter fiscal year 2015. The movie business is lumpy and extremely hits-driven. The next Transformers installment will come out in 2017.
Investment Thesis
Viacom has strong brands and assets. Some of their programming needs to be adjusted. For example, Viacom in recent years has featured reality TV, and consumer preferences have shifted to scripted TV. The investment thesis is that consumers will still tune into Viacom’s content and the company will be able to monetize the new distribution landscape. It’s clear that customers are cutting the cord and ending cable subscriptions. Instead, customers are watching Viacom’s content on the Internet through mobile devices.
As a result, traditional rating systems have become less meaningful and advertisers have shifted their dollars elsewhere. To address the issue, Viacom launched Viacom Vantage Beta in April 2015. Viacom Vantage is a data-centric platform that allows users to more precisely target specific audiences. On the latest Aug. 6 earnings call, Viacom revealed that Vantage has gone live with its 10 top customers across various industries.
During the quarter, international revenues grew 22% to $428 million, representing 16.5% of total revenue. The company has established viewership around the world. Management is particularly optimistic about its prospects in India, the fastest growing economy in the developing world. From the most recent 10Q:
Viacom is one of the four largest media network groups in India. Viacom 18 is the fastest-growing entertainment network in India operating 10 channels including MTV, Nickelodeon, Comedy Central and Colors, a leading Hindi general entertainment brand.
Not a Perfect Company
One item that may jump out when you view Viacom’s financials is the amount of debt. The debt to equity ratio is over 5, but all of the debt is at a fixed rate of 4.7%. The company is using the debt to buy back shares, which brings us to another negative. Management has been overpaying on their buybacks. $5 billion is authorized for more share repurchases and management has stated their intent to resume purchases in October.
Further challenges include the number of choices viewers have. Aside from Netflix, there are other competitors like YouTube, Twitch, Periscope, etc. It remains to be seen how much long-term impact these other channels will have.
Conclusion
- Viacom is not a stock for everyone. It does have some risk.
- At these prices, I believe there’s more upside than downside, but it might take a couple of years for the thesis to play out.
- I own a basket of old media companies such as Viacom, Time Warner and Fox. I’m also short puts on CBS. I expect the 2016 presidential race to boost ratings and provide some additional revenue.
- For patient investors, this may be a stock to consider.
