An improving U.S. economy and strong rating for the cable TV channels helped Viacom, Inc. (VIA.B) generate healthy revenue growth from advertising and affiliate fees. After a gap of one and half years, it seems that business enterprises are more inclined toward advertisement spends in order to win consumers’ attention. Several automakers, toy companies, technology companies, and retailers are at last raising their advertisement budgets. This in turn benefits the media companies and Viacom is no exception.
Viacom enjoys strong brand value with respect to its several cable TV channels. In the previous quarter, the company’s cable TV networks posted a solid performance as a result of considerable increase in ratings. Viacom’s flagship MTV channel witnessed a 10% increase in rating compared to the prior-year quarter.
Although the Paramount Pictures division continues to make losses, Viacom has reduced its operating loss by means of effective cost cutting measures. In the second quarter 2010, the operating loss of Paramount Picture was $86 million compared to $123 million in the year-ago quarter. Viacom has integrated the marketing groups for both theatrical and home entertainment. This change has not only reduced costs, but ensured more continuity in the marketing of films.
The stock is currently trading at significantly low multiples, with respect to several valuation metrics, compared to its peers. Given the substantial scope of profitability in future, we believe the current stock price does not adequately reflect Viacom’s true growth potential. We therefore upgrade our recommendation to Outperform.