Still Neutral on Viacom

On Feb 28, we maintained our Neutral recommendation on Viacom Inc. ( VIAB - Analyst Report ) , as the company’s bottom line meets the Zacks Consensus Estimates but the top line fell short of the same in the recently concluded quarter.

Why Remains Neutral?

Viacom benefits from a well-balanced asset mix with entertainment content at its core. The company enhanced its brands worldwide through the creation and acquisition of hit programming, new channels, successful motion pictures and other forms of entertainment, including video game offerings.

Viacom benefits immensely from its agreement to disribute digital content to online video streaming companies, such as Netflix and Hulu. These businesses generate very high margins, 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 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 distributed and there is limited scope for driving revenues by enlarging distribution channels. Viacom has done extremely well in its digital content distribution business.

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 have posed major threat for the cable TV operators, who may not be able to pay higher affiliate fees to Viacom since its contents can be viewed online.

Both its advertising and film business witnessed a huge drop in revenues, mainly attributable to weak viewership ratings, mainly for Nickelodeon and MTV channels and lack of hit movie releases. Moreover, the stock price is hovering around its 52-week high.

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

Other Stocks Outlook in Related Industries

Other companies belonging to the same media sector are CBS Corporation ( CBS - Analyst Report ) , which reported strong profit in the fourth quarter despite missing both the top and bottom line of the Zacks Consensus Estimates; Time Warner Inc.’s ( TWX - Analyst Report ) bottom line topped the Zacks Consensus Estimates with profit for the fourth quarter surging high with 24% and The Walt Disney Company ( DIS - Analyst Report ) beat both the top and bottom line of the Zacks Consensus Estimates, despite profit dipping 1.3% for the first quarter of 2013.

CBS Corporation has a Zacks Rank #2 (Buy) while bothTime Warner Inc. and The Walt Disney Company have Zacks Rank #3 (Hold).