A lot of analysts have pointed to problems Viacom faces as the media business changes, but a new report is especially harsh, comparing the owner of Nickelodeon and MTV to the old film and camera company Eastman Kodak.
“We cannot stop thinking about the remarkable similarities between the story of Eastman Kodak and our view of Viacom," Todd Juenger of Sanford C. Bernstein said in a new research report. “Basically two examples of once-dominant companies where the product that provides the majority of their profits (film; linear TV networks) is made obsolete by a digital world. Consumers are taking more photos than ever, and watching more video than ever—but using different underlying technologies with radically different economics and value chain structures.”
Juenger says that in the nearer-term, Viacom is a classic value trap because he thinks earnings estimates will continue to move lower. The cable networks are caught in a perpetual negative cycle of audience declines leading to lower ad revenue and risking distribution revenue. That puts pressure on content investment, which leads to more audience declines.
He notes that Viacom’s ad revenue has been down in recent quarters. Some have noted that Viacom’s ad revenue is down less than its ratings. While recent reports have attributed that to Viacom’s strategy of trying to emphasize sales based on non-Nielsen metrics, Juenger notes that Viacom is a leader in stuffing an increased amount of commercials in its progams. He calls that option unsustainable.
Juenger also notes that while Viacom often says that it is underpaid by MVPDs relative to its ratings, when you look at media companies without sports rights, Viacom is overpaid. It gets an average of $3.01 per month for its 25 channels, more than twice what Discovery, A+E Networks, AMC or Scripps Networks get in sub fees.
“Sadly, this story didn't have to play out like this,” Juenger said. “Viacom spent $14.5 billion on share buybacks since January 2011, which has delivered a negative IRR. Instead of buying over-priced shares in their structurally challenged assets, they could have re-modeled their company to better withstand the future. For $14.5 billion, they could now own some combination of: Lionsgate, Starz, AMC Networks, and/or multiple MCNs such as Maker Studios. Had they taken that different course, the share price may never have reached $88 in 2014, but we suspect it would be much more promising for 2017 and beyond.”
Juenger puts a target price of $57 on Viacom stock and rates it “Underperform.” It closed at $59.73 on Tuesday.
