Viacom's Turnaround Strategy: After Early Praise, Wall Street Focus Shifts to Execution
The stock has outperformed peers and drawn ratings upgrades, but now all eyes are on CEO Bob Bakish's game plan, with one analyst saying financial implications for now "remain unclear."
Three months into his tenure as permanent CEO of Viacom, Bob Bakish has earned early Wall Street praise for moving decisively to change the executive ranks and set a turnaround strategy for the entertainment company. Now, Wall Street is shifting its focus to how the plan plays out and affects business and financials.
Bakish's plan to reenergize Viacom, plagued by weak results at the Paramount film studio and U.S. ratings challenges for its youth-skewing networks in the digital age, by focusing on six core brands (namely MTV, Nickelodeon, Nick Jr., Comedy Central, BET and Paramount) last month won support from the board of the Redstone family-controlled company and many on Wall Street.
Several analysts upgraded their stock ratings and boosted their price targets in recent weeks. And they say the new focus at the company has shored up investor sentiment, which had hit rock bottom under former CEO Philippe Dauman, who was ousted last year.
In a sign of recent Street momentum, Viacom’s stock as of Thursday's $44.04 closing price is up 25.5 percent year-to-date, outperforming its sector peers. In comparison, Time Warner's stock is up 2 percent this year, corporate sibling CBS Corp. up 6 percent, Walt Disney’s stock is up 7 percent this year and 21st Century Fox up 9 percent. But many on the Street still believe that Viacom shares should trade at a lower stock multiple than its peers, and some say investors should sit on the sideline until clear signs that the new strategy is reaping success.
“The stock has been coming back, but it’s nowhere nearly as strong as a lot of other media companies. It’s still polarizing," Drexel Hamilton analyst Tony Wible tells THR. "You now have more people, like myself, who are believing in the story and a turnaround, but there are also people who really doubt Viacom has a viable spot in this changing TV ecosystem."
Wible recently upgraded Viacom’s stock from “neutral” to “buy” and raised his price target from $38 to $51, arguing that Bakish's plan “fits the new normal” of digital pay TV services and skinny bundles.
Others have similarly changed their outlook on the company's stock. Barrington Research analyst Jim Goss raised his rating to “outperform” from “market perform” with a price target of $55, saying the new strategy “should push Viacom's results in a favorable direction for several years.” And Wells Fargo analyst Marci Ryvicker boosted her rating from “market perform” to “outperform” and has raised her valuation range for the company twice since the unveiling of the new vision, citing “compelling risk/reward in a turnaround.”
Now, execution and proof of success will be key. "I think he has done a very good job in opening up an honest and realistic discussion about the challenges and opportunities he sees ahead," MoffettNathanson analyst Michael Nathanson tells THR about Bakish. "In terms of accomplishments, it will take some time before we see his plans turn into actual financial data points."
Wible concurs: "The question will be how well will they execute and how long does it take to execute." And Ryvicker wrote: “We see three steps to a turnaround: 1) New management (check!). 2) A plan/vision (check!). 3) Execution.”
But some on the Street aren't ready to upgrade the stock just yet. “At this time, the financial implications of this new strategy remain unclear," Telsey Group analyst Tom Eagan said in a recent report. "And until these are better understood, we maintain our ‘market perform’ rating."
Bakish himself has admitted that how well the strategy is put into place will be key. "We now have a clear path forward, which we as a management team, are absolutely convinced will create value and competitive advantage for the company," he said last month. "We just need to execute, and I’m confident we can do it."
Not all share his confidence though. RBC Capital Markets analyst Steven Cahall has been among the most bearish Viacom analysts since downgrading the stock to “underperform” with a $35 price target after the company said late last year that its talks about a potential sale to CBS Corp. had ended without a deal. “With a CBS/Viacom deal likely off the table, we think Viacom will revert to trading on earnings, where there are significant short-term and long-term pressures,” he said in December.
“Viacom has quickly become a preferred media name with investors,” Cahall acknowledged in a more recent report after the new strategy was unveiled, but highlighted that "we don't question the efficacy of the strategy, but rather its chance of success.” He explained: “Essentially, MTV and Comedy Central need to regain audience share, but much of that share of teen and millennial attention has structurally shifted to short-form video, social media and other entertainment substitutes, perhaps never to return to TV. Spike rebrands at a time when scripted originals are at all-time highs. While management notes the challenges (and sustained requirement for investment), we think the market is pricing in success without even considering the risks.”
His conclusion: “We are concerned about secular shifts and execution risks and maintain our $35 target. If we're wrong by the fiscal fourth-quarter, then we'll throw in the towel and buy the next round.”
Whether Viacom’s challenged U.S. cable networks can indeed bounce back is one core issue that many say they will be keeping close tabs on. Amid recent news that Hulu’s upcoming virtual pay TV bundle won’t include Viacom networks, some worry that could be a bad omen. “One concern … is that Viacom pulling resources from less popular networks may create a ‘have’ and ‘have nots’ dichotomy,” said Eagan. “Should operators opt out of carrying non-flagship networks, overall sub growth could decline, and therefore so could affiliate and ad revenue."
FBR & Co. analyst Barton Crockett similarly said that the company's new focus on core brands "makes sense, but comes with execution risk, including the question of whether growth at the favored brands (85 percent of revenues) at a time of secular headwinds can offset slippage at the unfavored brands."
Wible, on the other hand, thinks Viacom can position itself as a pioneer. "We increasingly see Viacom as an asset than can help [pay TV operators] cope with programing cost pressure as we believe [they] will inevitably have to re-bundle networks to include cheaper alternatives and digital content," he said.
Another big issue in the spotlight for Wall Street is the planned turnaround at Paramount. The studio’s recent $1 billion funding deal with Chinese partners has come under scrutiny amid payment delays, and while Jim Gianopulos remains the frontrunner to oversee the studio, no employment deal has been finalized.
“On the face of it, the new strategy of bringing film to TV and TV to film seems similar to Disney’s model, and we believe it has real potential, especially with the Nickelodeon brand,” said Eagan. “We note, however, that previous media company attempts to bring traditionally TV-based programs to the big screen haven’t always worked.”
But Nathanson lauded the exit of Paramount boss Brad Grey, saying that "cleaning up Paramount's failing leadership structure is a major positive and frankly was long overdue." And Morgan Stanley's Benjamin Swinburne said that a "normalization of Paramount's earnings power over the next two to three years can lead to a significant recovery in Viacom's free cash flow generation."
With the execution and success of Viacom's strategy now in the spotlight, analysts say some ratings and data points could improve faster than others. Signaling patience, Ryvicker assumes a “slow build” of financial momentum until fiscal year 2019. Or as Stifel, Nicolaus analyst Benjamin Mogil wrote in a recent report, in which he maintained his “hold” rating on the stock, but increased his value estimate for the company: "Rome wasn't built in a day."