Viacom forecasts, price targets cut

Analysts cite ad market woes in recession

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

In both cases, analysts cited worsening advertising market trends amid a recession as key reasons.

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."

Importantly, 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 some of Viacom's key ad categories, Morris warned. He said nearly 45% of the firm's advertisers are in industries he views as higher default risk, such as autos, retail, manufacturing and consumer products.

Overall, he now estimates 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 the "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" in an economic rebound, but there is so far no indication that an improvement is imminent.

Miller Tabak analyst David Joyce also lowered his Viacom forecasts on Friday and cut his one-year stock target from $29 to $25 "due to 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 now estimates fourth-quarter ad revenue will fall 6%, compared to a previous 4% decline.

He reduced his full-year 2009 earnings estimate to $2.62 per share from $2.76.

On Thursday, Barclays Capital analyst Anthony DiClemente had already lowered his Viacom financial forecasts.

He predicted a 7% ad revenue decline in 2009, worse than his average industry expectation for a 3% drop.

He also now estimates that Viacom will see a double-digit home video revenue decline this year.
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