Viacom’s earnings report was a disappointing miss — the only media company to do so this quarter and the first by Viacom since 2008 — and analysts’ reactions ran from bad to worse.
Best case scenario: things have to get better from here. Anthony DiClemente of Barclays Capital headlined his report “Viacom Inc.: Reaching the Trough?”
He’s lowering his estimates, figuring that domestic ad revenue will drop 6% in the fourth quarter. Despite that DiClemente is looking at Viacom as a “contrarian long in media” and maintaining his Overweight rating on Viacom stock which he thinks will hit $55 a share.
Todd Juenger of Bernstein Research notes that “the investment decision in Viacom hinges, of course, on whether one believes a turnaround is coming.” But Juenger says the data suggests that “the hole is getting deeper.”
Juenger notes that domestic ad revenues took a bigger hit relative to ratings in the third quarter than they did in the second. On top of that, Viacom’s international operations were doing more poorly than other media companies’.
“Viacom’s commitment to returning cash to shareholders limits potential Enterprise Value growth to levels which can be produced by the existing assets with run-rate levels of sustaining investment,” Juenger says. “Audience declines at the flagship networks, combined with availability of content via OTT sources, are jeopardizing the persistence of affiliate fee growth. We believe the vitality of the flagships is further at risk due to Netflix cannibalization, excessive program concentration risk at Nickelodeon, and structural inability to capture advertising value of audiences at MTV.”
John Janedis of USB lowered his estimate for ad growth in 2012 to -5% and expects 2013 growth to be zero. But while he notes that Viacom management is expecting modest growth in ad revenue on a sequential basis, there are bigger issues, as far as he’s concerned.
Viacom’s “investment in content and programming across the platform will need to start demonstrating improvement in early fiscal 2013 for the market to regain confidence that the Viacom complex does not have long-term structural issues,” Janedis says. “We still believe ratings are content-driven and that audiences find compelling content. We would expect to see some mean reversion for the stock vs. peers when ratings turn, though thing it’s too soon to make that call.”