Viacom (NYSE:VIAB), one of two media companies controlled by Sumner Redstone, has been the laggard of the sector this year, as Wall Street fretted about ratings declines at its cable networks including Nickelodeon. Investors, though, shouldn’t throw in the towel on this stock yet.
For one thing, Nickelodeon, which has been the top-rated basic cable network for 17 straight years, still has plenty of life in it as does another of Viacom’s cash cows, Comedy Central.
The children’s TV network, which reportedly accounts for about one-third of Viacom’s cash flow, has been a particular concern because the drop-off in some of its shows was particularly dramatic. Viacom has made improving the channel a top priority, adding original content and revamping old favorites. It’s a strategy that seems to be paying off.
SpongeBob SquarePants, which made its debut in 1999, and Teenage Mutant Ninja Turtles (TNMT), which Nickelodeon recently resurrected, have been a roll for the past few weeks. SpongeBob has won the kids’ TV ratings battle for three weeks in a row, and TMNT won its time period by double digits during the week of Oct. 28-Nov. 4. The channel’s slate of new shows seems promising.
Another plus: Young adults continue flocking to The Daily Show and The Colbert Report. These shows outdrew the cable news channels among viewers 18 to 34 during major news events such as the political conventions. It was hardly a shock that President Obama stopped by The Daily Show during the campaign given the show’s cachet among hipsters and those who aspire to be one. Tosh.o, another Comedy Central show, also continues to resonate with younger viewers.
Viacom also keeps tinkering with its other channels’ schedules and has mercifully decided to pull the plug on The Jersey Shore at the end of the current season. Its film business may rebound next year when offerings such as the latest installment of Will Ferrell’s Anchorman franchise are scheduled to be released.
“Every content business has its creative ups and downs,” said Brett Harriss, an analyst with shareholder Gabelli & Co., in an interview, adding that ratings are showing improvements at both channels. He’s also bullish on Viacom’s growth potential overseas.
The stock certainly is a bargain. Viacom currently trades at a price-to-earnings multiple of 14.28, a discount to Walt Disney‘s (NYSE:DIS) 15.38, Time Warner‘s (NYSE:TWX) 16.83 and News Corp‘s (NASDAQ:NWS) 22.42. The average 52-week price target on the stock is $58.39, about 18% higher than where it currently trades.
While there’s no doubt that declines in cable ratings have hurt Viacom’s bottom line, the same is true for its rivals as well. It stands to reason, however, that if these companies are seeing improved performances in their cable content businesses, then Viacom’s channels would also experience a rebound. As it stands now, Wall Street expects this past quarter to be a disaster for Viacom, with a 16% decline in revenue. Analysts forecast a 3.9% fall in the December period.
In comparison, Time Warner’s Networks business, including HBO and TBS, rose 4% and operating income jumped 12%. Comcast (NASDAQ:CMCSA) saw a 3.2% gain in revenue at its cable networks business, and operating cash flow rose 7.6% At News Corp, operating income in the Cable Network Programming business surged 23% in the last quarter as revenue rose 3.2%.
If Viacom can match its rivals, it offers the potential for high rewards with few risks.
As of this writing, Jonathan Berr didn’t not own shares of any securities mentioned here. Follow him on Twitter @jdberr.