During its earnings call last week, management at struggling Viacom tried to paint a picture of ratings and ad revenue growth turning positive in the second half of the year.
Some on Wall Street cheered that the company might finally bounce off the bottom, justifying their buy recommendations on Viacom stock.
But Todd Juenger of Sanford C. Bernstein & Co. isn’t buying it. Citing a lack of creative capability among the company’s leadership, he is rating Viacom “underperform” and has a target price for the media company’s shares at $52, which is harsh considering they closed above $60 last week (but was down almost 2% at midday Monday).
In a note Monday, Juenger scolds that for an investment to be a turnaround story, the stock must be inexpensive and an operational turnaround must succeed. “For Viacom, we are pretty sure that neither case is independently true, but chances of BOTH being true are very low,” he says. “The stock is near all-time highs, while ratings remain near historic lows.”
Juenger attributes Viacom’s ratings issues to “a lack of institutional creative capability, perennial under-investment, excessive reliance on too few hit programs and liberal online distribution.” And while Viacom’s big stock buyback program has boosted shares, “we don’t believe Viacom’s aggressive cash return plan creates value; in fact we’d rather see them invest behind their brands.”
Juenger says that he sees no evidence of a positive ratings trajectory and adds that the company’s most important networks face pressure because they depend on young viewers. That pressure is being intensified by the company’s decisions to allow those viewers to watch programming on less profitable platforms, such as SVOD and online.
He pointedly adds that “the same leadership that got the company into this mess is still largely in place, with the exception of MTV (where even a superhero couldn’t overcome the near-terms comps).”
Juenger notes that Judy McGrath resigned as CEO of MTV in May 2011. That means that “all the founding visionaries who built the network are gone,” he says. “Nickelodeon has shuffled its mid-layer executives post-ratings collapse, but the ultimate leadership has not been changed.”
Even if he’s not right, Juenger says that the market has already included potential ratings and revenue growth in Viacom’s stock price.
“To be a buyer at $60 a share, one would have to believe Viacom’s business will not only recover at the pace indicated by management, but exceed that pace. We believe that is highly unlikely,” he writes.