Why Wall Street Remains Wary About Viacom

Under normal circumstances, investors would consider Viacom shares to be a screaming bargain. Consider: Most Big Media companies trade for anywhere from 15.3 times expected earnings (that’s Fox) to 17.2 times (for Disney). And Viacom? 10.2 times.

To put that into perspective, it means that the Street expects ad sales to deteriorate by 6% a year through 2018, Wunderlich Securities’ Matthew Harrigan says today. That “would be realized only in a global economy in free-fall, or sudden irrelevancy of MTV Networks to its young viewing demographic.”

Investors aren’t that apocalyptic. Yet Viacom shares remain depressed, even after CEO Philippe Dauman’s measured but upbeat forecasts in yesterday’s Q4 earnings call with analysts. The stock closed down 4.6% today, giving up a modest gain on Thursday and touching a 52-week low.

What’s holding Viacom down? Several things, according to the latest analyst reports.

Ad fears. Domestic ad revenues fell 6% in Q4, partly due to falling ratings, the company says. But it might mask a deeper problem. “Viacom was one of several companies who preserved ad revenue to some extent by stuffing more ad units into its TV programming,” says Bernstein Research’s Todd Juenger — one of the company’s fiercest critics. Execs say the current quarter probably will be just as weak; Viacom has to offer so many make-goods that it has little inventory to sell.

Redstone worries. Chairman Sumner Redstone’s absence from yesterday’s call — he usually kicks things off by calling Dauman “the wisest man I have ever known” — revived concerns about his health. The composition and agenda of the trust that would take charge when the 91-year-old majority shareholder leaves the stage remain “opaque from the outside,” Harrigan says.

Cash concerns. Viacom said it expects to reduce its share repurchases as it looks to do other things such as buy media properties in India. That’s a potential problem because the stock buybacks have “provided key support to [Viacom’s] share price,” says Maxim Group’s John Tinker.

Digital dilemma. Analysts for the most part were encouraged to hear that Nickelodeon plans to introduce a subscription streaming service. But the devil’s in the details, which are yet to be disclosed. If it’s too attractive, then it — along with other companies’ streaming initiatives — “will most certainly change the ecosystem and disrupt what historically have been both stable and predictable revenues” from the pay TV bundle, Moody’s Investors Service’s Neil Begley says. A kids offering could be particularly dangerous to the status quo because “the content does not typically appeal to millennial cord nevers.”

Programming prospects. Dauman said he expects to see a “substantial net cost savings throughout our organization” as a result of a restructuring that includes an “organizational realignment as well as rationalization of content that no longer meets our goals.” That troubles Guggenheim Partners’ Michael Morris if it means a cut in the programming budget. It could leave Viacom “less-well positioned to grow its popularity on television or other platforms,” he says.