Viacom Inc. (VIA.B) reported mixed financial results for the third quarter of fiscal 2010. Net earnings soared in the reported quarter while revenues remained lackluster. In tune with the results, the recent Zacks Consensus Estimate revision trend also remains flat.
We believe positive and negative factors are equally responsible for this mixed opinion among analysts. Growth in affiliate fees, theatrical and advertising revenues were offset by lower home entertainment revenues.
Second Quarter Highlights
Quarterly net income from continuing operations was $418 million or 68 cents per share compared to a net income of $298 million or 46 cents per share in the prior-year quarter. Third quarter 2010 EPS of 68 cents was well above the Zacks Consensus Estimate of 65 cents. Quarterly total revenues of $3,301 million remain flat year-over-year. However, revenues were below the Zacks Consensus Estimate of $3,383 million.
Quarterly operating income was $894 million, up 35% year-over-year driven by the solid performance of the Media Networks segment and highly effective cost management strategy of Viacom for its Filmed Entertainment segment.
Agreements of Analysts
Of the 23 analysts covering the stock, in the last 30 days, 7 of them upwardly revised their estimates for the ensuing fourth quarter and 4 of them revised estimates downward. For the first quarter of fiscal 2011, out of 11 analysts covering the stock, 2 analysts upwardly revised their estimates while 2 others moved downward.
Furthermore, 8 analysts have raised their estimates for full fiscal 2010 and 2011 respectively during the same time period while 2 analysts reduced their estimates for fiscal 2010 and 3 analysts reduced it for fiscal 2011.
We believe the positive sentiment mainly comes from higher advertising revenues and affiliate fees. Several enterprises are raising their advertisement budgets. This in turn is benefiting the media industry and Viacom is no exception. The company enjoys strong brand recall with respect to its several cable TV channels. Viacom is generating solid revenues from affiliate fees it charges cable TV providers to beam its channels.
The negative opinion mainly comes from the gradual decline of the Paramount Pictures Division. This was primarily due to fewer films released by Paramount movie studio. Furthermore, the growth rate of Viacom’s advertisement revenues underperforms that of its nearest rivals. Viacom’s domestic advertisement revenues grew by a mere 4% compared to a massive 14% for Time Warner Inc. (TWX) and 11% for News Corp. (NWS).
Currently, the Zacks Consensus EPS Estimate for the fourth quarter is 68 cents. If that materializes, it would result in a decline of 0.82% year-over-year. However, for fiscal 2010, the current Zacks Consensus EPS Estimate of $2.83 indicates a respectable gain of nearly 10.7% year-over-year.
Magnitude of Estimate Revisions
In line with the mixed estimate revision trend, the Zacks Consensus Estimate has remained the same in the last 30 days, for the ensuing fourth quarter and also for fiscal 2010. For fiscal 2011, however, the Zacks Consensus Estimate moved up by 4 cents in the last 30 days.
Our Recommendation
We believe an improving U.S. economy and strong rating for the cable TV channels will enable Viacom to maintain profitability in the long-run. Prudent cost control in the Paramount Pictures Division reduces its operating losses. Recently, Fitch Ratings upgraded the long-term credit rating of Viacom to “BBB+” from “BBB”.
On the other side, Paramount Pictures continue to face sales decline primarily due to a massive drop in DVD sales. Revenues of the Filmed Entertainment segment were down 10% year-over-year. In contrast, during the same quarter, NBC Universal Studio, Warner Brother Studio, and Disney Studio significantly increased their revenues.
We thus maintain our long-term Neutral recommendation for Viacom. Currently it is a short-term Zacks #3 Rank (Hold) stock.
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