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Analyst Blog

On Feb 25, 2014, we issued an updated research report on Viacom Inc. (VIAB - Analyst Report). The company reported better performance based on strong contributions from solid advertisement and affiliate fee revenues. However, lack of popular movie releases during the quarter has somewhat muted the overall financial performance of the company.

Viacom has delivered positive earnings surprise in all the three quarters except for one quarter last year, with an average beat of 2.88%. The company reported mixed financial results for the first quarter of fiscal 2014 with the bottom line beating the Zacks Consensus Estimate but the top line missing the same.

Viacom benefits immensely from its agreement to disribute digital content to online video streaming companies, such as Netflix Inc. (NFLX - Analyst Report) and Hulu. These businesses generate very high margins, of around 75%, while facilitating the company to significantly improve its bottom line. Management is hopeful that it will be able to expand its digital content distribution deals, both in the U.S. and in the international markets going forward. Moreover, Viacom is generating strong free cash flow, enabling the company to maximize its shareholders’ wealth through dividend payments and significant share repurchases.

On the flipside, the cable TV industry in the U.S. is highly matured and saturated. Viacom’s flagship cable channels are already well distributed and there is limited scope for driving revenues by enlarging distribution channels. Viacom’s digital content distribution business has been performing extremely well.

However, in the long run, these lucrative deals with online video streaming companies may act as a boomerang for the company. Moreover, online video streaming companies pose a major threat for the cable TV operators who may not be able to pay higher affiliate fees as Viacom’s contents can be viewed online.

Currently, Viacom has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Other stocks worth considering in this sector include The Walt Disney Co. (DIS - Analyst Report) and News Corp. (NWSA - Analyst Report). The Walt Disney has a Zacks Rank #1 (Strong Buy), while News Corporation carries a Zacks Rank #2.

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