Skeptical analysts work over Viacom

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A couple of analysts slashed their earnings forecasts and price targets for Viacom, a day after a similar Wall Street double whammy hit News Corp.

In both cases, analysts cited worsening advertising market trends during a recession as a key reason.

UBS analyst Michael Morris on Friday cut his price target on Viacom from $27 to $18 and downgraded the stock to "neutral," citing "near-term concerns focused on advertising demand and film outlook."

He argued that while investors are aware of ad-market challenges, "the severity of declines in 2009 is underestimated."

For example, there is a risk of higher debt defaults in 2009, which could affect Viacom's key ad categories, Morris warned. He said nearly 45% of the firm's advertisers are in industries he views as high default risks, including automobiles, retail, manufacturing and consumer products.

Morris estimated that Viacom's 2009 U.S. ad revenue will decline by 7.3%, compared with his previous estimate of a 3.7% decrease. He added that expectations for 2009 film results are "too high given a reduced slate and fewer blockbuster distribution deals."

Morris also criticized Viacom for not having found solutions for longer-term challenges.

"Ratings declines at core networks remain a challenge that lacks a new solution," he wrote. "Paramount's CEO Brad Grey was recently given a new contract despite the division's poor relative profitability over the last three years."

Also, he blasted an "inefficient ownership structure" that sees more than 80% of Viacom's voting power controlled by chairman Sumner Redstone.

Morris argued that Viacom shares "could appreciate significantly" during an economic rebound, but there is no indication an improvement is imminent.

Miller Tabak analyst David Joyce also lowered his Viacom forecasts Friday and cut his one-year stock target from $29 to $25 because of "slowing DVD sales and ad revenue in the fourth quarter, a strengthening U.S. dollar that negatively affects translation, weaker first-quarter 2009 advertising and greater theatrical release expenses as there is a shift of more titles into the first quarter from the second quarter."

Joyce estimates that Viacom's fiscal fourth-quarter ad revenue will fall 6%, compared with a year-earlier 4% decline. He reduced his full-year 2009 per-share earnings estimate from $2.76 to $2.62.

Barclays Capital analyst Anthony DiClemente lowered his Viacom forecasts Thursday. (partialdiff)
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