We have downgraded our recommendation for Viacom Inc. (VIA.B) from Outperform to Neutral ahead of its fourth quarter 2009 financial results.
According to our assessment, the company’s advertising revenue will remain challenged due to continuation of demand softness in the advertising market throughout the world. Viacom derives substantial revenues from the sale of advertising on a variety of platforms, and a decline in advertising expenditures could adversely affect the company’s revenues and operating results.
Viacom’s success is dependent upon audience acceptance of the company’s programming, motion pictures, games and other entertainment contents. The production and distribution of its entertainment content are inherently risky businesses; it is very difficult to predict consumer’s taste. Home entertainment sales may remain tepid reflecting an industry-wide decline in DVD sales.
Viacom has a highly leveraged balance sheet. At the end of the third quarter 2009, the company had $249 million of cash & cash equivalents and $6,852 million of outstanding debt on its balance sheet. In the same quarter, the total debt servicing charge was $191 million, compared to $123 million in the prior-year quarter.
On the other hand, effective expenses control measures taken by the management together with an improving economic outlook may help Viacom to counter slump in the advertising business. The company enhanced its brands worldwide through the creation and acquisition of hit programming, new channels, successful motion pictures and other forms of entertainment, including video game offerings. However, we believe these positives are already reflected in the current valuation leaving little room for above market gain.
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