Marcial: Some Rave Reviews for Viacom

The entertainment giant's stock is sagging, but analysts point to assets like its Rock Band video game and Paramount film studio

Viacom (VIA) -- 52-week stock price

By Gene Marcial

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With its shares getting thumbs-down from investors, Viacom (VIA) doesn't have many cheerleaders on Wall Street. The stock is in the cellar, having hit a 52-week low of 28 a share on Aug. 1, down from a 52-week high of 44.95 on Dec. 16, 2007. Although the major film producer and operator of cable television networks reported better-than-expected second-quarter results on July 29, analysts worry about continued weakness in its cable networks' advertising revenue growth.

Nonetheless, Viacom Chairman Sumner Redstone remains upbeat, and is the company's staunchest advocate. Despite some clouds hovering over Viacom, Redstone told analysts during a conference call on July 29 that "there are reasons for optimism." As of Aug. 8, however, the stock continued to languish at 29.64.

Even so, some of Viacom's major investors tend to agree with Redstone, who controls some 70% of the voting stock. "There is, indeed, something to be optimistic [about] in Viacom's case," says investment mogul Mario Gabelli, chairman and CEO of Gamco Investors (GBL), which holds an 8.4% stake. He acknowledges that "cyclical advertising challenges" are hampering sales and earnings, "but Viacom's business isn't broken" and the company has an "attractive business model with significant recurring revenues, high profit margins, and low capital intensity."

Potential Sale

Indeed, Viacom has become the model of a pure play in entertainment content, says Viacom Executive Vice-President Carl Folta, after spinning off CBS on Jan. 3, 2006, and focusing on its media networks (including MTV, Nickelodeon, and Comedy Central) and its film studios Paramount Pictures and DreamWorks, acquired in January 2006. The film entertainment unit is one of the company's major revenue drivers, posting a 35% gain in the second quarter. That helped the company's total quarterly revenues jump by 21%. The box-office returns from Viacom's hits Iron Man, Indiana Jones and the Kingdom of the Crystal Skull, and Kung Fu Panda were major contributors to the big revenue boost.

One possibility some big investors are considering—but aren't talking much about just yet—is the potential sale of Viacom. Some analysts put Viacom's private market value at 50 to 55 a share—for a total value of 31 billion to 34 billion. The reason the subject doesn't usually come up is that Redstone, now 85, has always insisted he would not sell the company. So far, there aren't any signs the idea is being pursued at Viacom at all.

But should Viacom decide to sell, "there would a long line of potential bidders or buyers," says one analyst. Several pros argue that a deal could happen one day soon, which they say should be another reason for buying the shares now.

Right now, however, investors are paying more attention to Viacom's efforts to shore up its businesses during the current economic downturn. The market isn't yet paying for the growth Viacom has achieved, says Jeffrey Logsdon, an analyst at BMO Capital Markets (BMO), who rates Viacom outperform. "But it should over the next nine to 15 months," he says. Management has completed most of the structural elements of its redesign plan, notes Logsdon, "which should help drive healthy revenue, earnings before interest, taxes, depreciation, and amortization [EBITDA], and earnings-per-share growth in the current economic environment."