Needham & Company Downgrades Viacom (VIAB) to Hold on Valuation, Other Worries

August 5, 2013 7:35 AM EDT
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Needham & Company analyst Laura Martin downgraded Viacom (NASDAQ: VIAB) from Buy to Hold citing valuation, EPS revisions, ratings weakness and affiliate fees.

The analyst notes shares of Viacom up 21% from June 12, versus 6% for the S&P 500. This has placed valuation at a premium to comparable companies, although on a P/E basis shares look inexpensive. "VIAB embeds a 4.5% CAGR of EBITDA for the next 10 years, based on a Breakeven DCF (our favorite form of valuation), in line with its peers," the analyst notes. "At $79/share, we believe VIAB's $20B share repurchase authorization, Nickelodeon's ratings momentum, double-digit affiliate fee growth, new Amazon deal, and strong upfront ad sales are all in the share price already."

The firm lowered FY 2013 EPS from $4.75 to $4.63 and establish a FY 2014 revenue estimate of $14.4B and an EPS estimate of $5.44.

On ratings, the firm noted that while its largest channel, Nickelodeon, reported 6% y/y ratings growth in the June quarter, most of the other 12 VIAB channels reported negative earnings momentum.

On affiliate feeds, the firm noted VIAB's affiliate fee revenue grew 26% y/y despite declining ratings for many of its channels. Channel checks and recent news events underscore growing bitterness over affiliate fee growth, the analyst said. "Distribution companies are telling us that if they can negotiate wholesale deals with Netflix and/or Amazon they could create substitutes. For example, one cable distributor told us that he had done the math when VIAB was still on Netflix and he could save $30mm/year if he dropped all VIAB channels, which was 18% of his total programming costs. To avoid churn, he could provide the 10% of his subscribers that wanted Viacom content a Netflix package for free and report zero increase in his total programming costs for 1-3 years. His deal with VIAB isn't up for several years, but putting its content on SVOD platforms may add risk of substitution to VIAB, or at least limit its affiliate fee pricing power."

For an analyst ratings summary and ratings history on Viacom click here. For more ratings news on Viacom click here.

Shares of Viacom closed at $79.17 yesterday.

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