Viacom Still in Neutral Lane

Zacks

We are maintaining our Neutral recommendation on Viacom Inc. (VIAB), based on its fourth-quarter 2012 financial results, where the bottom line topped the Zacks Consensus Estimates but the top line fell short of the same. Weaker advertising revenue coupled with lackluster movie box-office performance has resulted in a 17% decline in revenue for the reported quarter.

Recently, Viacom-owned Nickelodeon and MTV channels (most popular networks) are facing huge drop in viewership ratings, thereby affecting its advertising revenue. Moreover, higher programming expenses as well as sluggish economic growth will continue to hamper revenue growth in near future. Furthermore, stiff competition from online video streaming companies and saturated U.S. cable TV industry will also act as a headwind for the company while moving ahead.

On the flip side, strong free cash flow along with continuous share repurchase and dividend payouts will act as strong catalysts for growth going forward. Moreover, increased investment on original program content will further step up TV ratings in the forthcoming quarters.

Higher usage of smartphones and tablets has induced the company to move toward TV Everywhere service offering. So, in order to boost this new service offering, Viacom is constantly renewing its contract with Hulu or striking new video streaming deals with Barnes & Noble, Inc.’s (BKS) Nook readers and Amazon.com Inc’.s (AMZN) Kindle readers. The company has also renewed its contract with Hulu and Directv (DTV), which will further drive the company’s top-line growth going forward. In addition, strong movie lineups for fiscal 2013 will bolster the film division business of the company moving ahead.

 We are maintaining our long-term Neutral recommendation on Viacom Inc. Currently, it has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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