Questions Surround Viacom as It Readies Earnings Report

Viacom Signage - H 2016
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Viacom Signage - H 2016

Box-office disappointments and Redstone legal troubles overshadow its rising stock values.

A salacious lawsuit involving founder Sumner Redstone and a former girlfriend, combined with box-office bombs and falling TV ratings, has caused the noise around Viacom to be so loud that one could be forgiven for not noticing a rising stock price.

Viacom's shares, cut nearly in half over the past couple of years, have risen 6 percent this year. And ahead of its fiscal second-quarter financial results scheduled Thursday, several large investors are betting the stock will go higher still. Among those that have purchased shares lately are CenturyLink Investment Management, Capital Impact Advisors, Jacobs & Co. and Biltmore Wealth Management.

“We’re more positive about our business than people think we are,” one insider quips, acknowledging the negative publicity surrounding Viacom lately.

Viacom dodged a major bullet when, on April 21, it inked a distribution deal with Dish Network for 18 of its channels, including some that will go on Dish’s skinny-bundle offering, Sling TV. Some analysts said if Viacom had lost Dish it would have cost the conglomerate $800 million a year in profit and its shares would have plunged about 40 percent.

“Dish was huge for Viacom, but the pessimism over a deal getting done was way overblown,” says an insider.

That crisis averted, analysts will focus Thursday on TV ratings and the Paramount film studio.

Viacom CEO Philippe Dauman wants to sell a piece of Paramount to a strategic partner and says there are three dozen interested parties. Some insiders, though, say 92-year-old Redstone, who controls the company through his majority stake in the voting shares, objects to the sale of any part of what he considers the crown jewel of his media empire.

Nevertheless, the sale process continues, and Dauman is expected to say as much on Thursday — though investors looking for details will likely be disappointed.

Viacom paid $9.8 billion for Paramount in 1994, but some analysts estimate it is worth only $5.5 billion today, unless foreign bidders looking for a foothold in the American film industry bid the price higher.

Not helping the valuation were the performances of Zoolander 2, which brought in $56 million worldwide on a $50 million production budget; and Whiskey Tango Foxtrot, which was good for just $23 million worldwide on a $35 million budget.

While analysts weren’t expecting Paramount to post a profit in the quarter, they now figure the studio will lose at least $100 million more than it otherwise would have lost had those two managed to simply break even.

While a slew of analysts are chastising Paramount for its underperformance, all seem excited about the slate over the next year or so. Some of the big tentpoles include Teenage Mutant Ninja Turtles: Out of the Shadows, Star Trek Beyond, Ben-Hur, Jack Reacher: Never Go Back, Baywatch and World War Z 2.

“We expect Viacom will be successful in selling a portion of Paramount to a strategic investor,” says Telsey Advisory Group analyst Tom Eagan. “After many years of reducing film slates and severing production staff, Viacom is finally expanding its investment and the Hollywood profile of Paramount.”

On the TV front, analysts are looking for single-digit growth in affiliate fees and they’ll want clues as to how much the new Dish deal is actually worth.

“While Dish is the most recent, agreements over the past year with Charter, AT&T, Mediacom, Frontier all speak to the intrinsic value of Viacom’s networks,” says Jefferies analyst John Janedis.

Comedy Central and MTV are still struggling mightily — and MTV president Sean Atkins promises a renewed focus on music going forward — but Nick at Nite and VH1 are growing, as is the international TV business.

Analysts are expecting the whole of Viacom to earn about 75 cents per share in the quarter on about $2.98 billion of revenue, representing a year-over-year decline of 35 percent on per-share profit and a 3.3 percent decline in sales.

Despite a barrage of negative media coverage of late, most Wall Street analysts are slightly bullish on Viacom. The mean average of 30 price targets is $46.80, suggesting the stock will rise 8 percent in the next 12 months, but the high target is $87, indicating shares will double within a year.

“Investors will be most interested in any further detail Viacom will offer on the Dish deal, such as any tiering of smaller networks and the pattern of any price increases,” says Northlake Capital Management’s Steven Birenberg, who bought shares of Viacom twice in the past week.

“Investors will also be closely eyeing trends in advertising growth,” he says, “and an update on Paramount’s partial sale would be nice, but if they don’t have a deal yet I'd be surprised if any meaningful color is provided.”