Viacom Downgraded to Neutral

We downgrade our recommendation for Viacom Inc. (VIA.B) to Neutral following mixed financial results for the third quarter of fiscal 2010. Net earnings soared in the reported quarter while revenue remained lackluster. The stock price has moved up by nearly 46% in the last one year and currently has limited upside potential.

Paramount Pictures continues to face sales decline primarily due to a massive drop in DVD sales. Quarterly revenue of the Filmed Entertainment segment was down 10% year-over-year. This was primarily due to fewer films released by Paramount movie studio. In contrast, during the same quarter, NBC Universal studio, Warner Brothers studio and Disney studio significantly increased their respective revenues.

In accordance with the industry trend, advertisement revenue of Viacom also grew but was below its nearest rivals. In the third quarter fiscal 2010, Viacom’s domestic advertisement revenue grew by a mere 4% compared to a massive 14% for Time Warner Inc. (TWX) and 11% for News Corp. (NWS).

Nevertheless, we believe an improving U.S. economy and strong rating for the cable TV channels will enable Viacom to maintain profitability in the long-run. Strong rating for the flagship MTV network resulted in solid growth of affiliate fees. Prudent cost control in Paramount Pictures reduces its operating losses. Increase in advertisement expenses by several enterprises will benefit the media companies in the near-term including Viacom.

For the first time in its history, Viacom paid quarterly revenue of 15 cents per Class A and B common outstanding shares on July 1, 2010. The Board of Directors of Viacom has also authorized a $4 billion share buyback program. We believe the company will be able to meet these expenditures without any difficulty due to its enormous annual cash flows of around $1.5 billion. Recently, Fitch Ratings upgraded the long-term credit rating of Viacom to “BBB+” from “BBB”.

VIACOM INC-B (VIA.B): Free Stock Analysis Report

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