Viacom Banks on Box-Office Hits for Turnaround in Movie Biz

On Aug 29, 2014, we issued an updated research report on Viacom Inc. (VIAB).

Viacom has delivered positive earnings surprises in three of the four quarters last year, with an average beat of 3.61%. The company reported weak financial results in the third quarter of fiscal 2014 with both the top and the bottom line missing the Zacks Consensus Estimate.

Meanwhile, Viacom largely benefits from its agreement to disribute digital content to online video streaming companies, such as Netflix Inc. (NFLX) and Hulu. These businesses generate very high margins, of around 75%, while facilitating the company to significantly improve its bottom line. Viacom also offers video-on-demand websites to AT&T, Inc.’s (T) U-Verse customers and Time Warner Cable.

To add to the positives, Viacom boasts strong free cash flow, enabling the company to maximize shareholders’ wealth through dividend payments and significant share repurchases. We also remain confident of a turnaround in the company’s movie business with the recent release of “Transformers: Age of Extinction” that garnered nearly $1 billion.

On the flipside, the cable TV industry in the U.S. is highly matured and saturated. Viacom’s flagship cable channels are well distributed and there is limited scope for revenue generation through channel expansion. Moreover, online video streaming companies pose a major threat to cable TV operators in the long run as it may not be willing to pay higher affiliate fees as Viacom’s content can be viewed online. Thus, it may result in a drop in revenues.

Currently, Viacom has a Zacks Rank #3 (Hold). Another better-ranked stock worth considering in this sector is The Walt Disney Company (DIS) with a Zacks Rank #2 (Buy).