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Viacom Downgraded to Neutral

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We downgrade our recommendation for Viacom Inc. to Neutral due to continuing downturn in the U.S. box-offices. Ticket sales for the 2010 Memorial Day week was around $187 million, down 16% year-over-year.
 
Viacom’s first quarter 2010 revenue from the Filmed Entertainment segment was down 18% year-over-year. Worldwide home entertainment revenue was down 34% year-over-year. Theatrical revenue was down 6% year-over-year. Worldwide television license fees decreased 16% year-over-year.
 
Overall financial result in the first quarter 2010 was also below the Zacks Consensus Estimates. This was primarily due to fewer films released by Paramount Pictures and ongoing slump in DVD sales. We do not expect any immediate turnaround in the U.S. movie industry.
 
Nevertheless, an improving U.S. economy and strong rating for the cable TV channels will help Viacom generate healthy revenue growth from advertising and affiliate fees. Rise in advertisement expenditure by several enterprises is likely to benefit Viacom in future reporting quarters.
 
In the first quarter 2010, Viacom increased its ad sales for the first time in nearly two years. We believe this trend will continue in near-future. Strong cable TV rating especially for the flagship MTV network resulted in solid growth of affiliate fee revenue.
 
However, according to our view, all these positives have already been reflected in the current valuation, which moved up 68.5% in the past one-year, leaving little room for any above market gain.

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