Viacom (VIA.B), the New York based broadcasting company is among the biggest surprises this year in an industry providing stunning upside when least expected. The global media conglomerate is retaking its place at the forefront of the entertainment industry, with VIA stock up 15% in this challenging year.
Viacom’s media empire ranges from Spongebob Square Pants and The Daily Show with John Stewart to MTV as it vies to become the source of humor, music, fashion and opinion for young people from ages 5 to 35.
What separates Viacom from its broadcasting competitors Time Warner (TWX), Walt Disney (DIS), andNews Corp (NWSA) is the ability to attract the prized 12-34 demographic. Advertisers are willing to pay the most to reach this malleable group before they develop brand loyalty.
Viacom started off at the opposite end of the spectrum, focusing on family shows like All in the Family, and the Cosby Show after its 1973 spin off from CBS. The firm then shifted to aim at hard-to reach demographics, using MTV, Nickelodeon, and Black Entertainment Television to reach teenagers, young children, and African Americans. It also owns Comedy Central, Spike TV, VH1, and CMT, which attract specific groups of viewers that other networks cannot.
In 1999, Viacom bought CBS, its former parent. Expectations were incredibly high but the stock fell sharply with the burst of the tech bubble and has since stagnated. Its marriage with CBS did not last and in 2005 the two companies split again. Viacom kept the high growth businesses such as MTV while CBS retained its news department, network affiliates and CBS Sports.
Viacom shares found a support level in 2009 and have since had rebounded to a $20 billion market cap via growth to $13.5 billion in annual sales. VIA recently retook its five-year moving average with small but consistent levels of buying by bulls that suggest a sustained uptrend.
Viacom’s tentacles extend to the movie industry: It owns Paramount Pictures, which holds the rights to some of the most popular films ever made. Its collection includes Alfred Hitchcock classics as well as modern series such as Mission Impossible, Transformers, Iron Man, andShrek. Paramount also has distribution agreements with Dreamworks (DWA) and multiple co-productions with Marvel.
This should be a strong area of growth for Viacom as construction of 3-D movie screens is set to double this year and the number of film studios has declined. Analysts expect big budget releases such as Iron Man 2 to dominate the 2010 box office.
Viacom’s portfolio also includes digital assets such as Atom.com, a destination for funny web clips, as well as virtual pet site Neopets.com and Harmonix, developer of the popular Rock Band video game franchise.
Online film alternatives such as Netflix threaten the dominance of cable television but ultimately quality video content must be created — and customers have shown they will pay for quality. Viacom is expected to develop a monthly subscription model for its programs if the pricing environment changes, in part to blunt the erosion of its high-margin DVD sales.
Chairman Sumner Redstone controls Viacom but is looking for ways to return more value to fellow shareholders, such as through a new 1.7% annual dividend. Going forward, analysts believe that Redstone has plans to expand the company internationally while keeping its domestic roots intact.
Common metrics such as its 20% return on equity and 23% operating margin are much higher than competitors Time Warner and Disney. I expect Viacom to earn $3.08 per share in 2011. Coupled with a 15 P/E, we’re looking at a $46 price target, or 39% from here. It’s a buy on dips.
