Date: December 1, 2011
Macroeconomic, Industry and Stock Market Overview
Viacom has two classes of shares, Class A with voting rights and Class B without. The entertainment and media industry has been hit hard by the financial crisis as people cut back their expenditure on entertainment. New technologies such as high-definition, Blue-Ray, digital distribution and 3D are gaining popularity and promise to reshape the industry. Other issues include rising production costs, piracy issues and high risk in ROI. The movie production subgroup shows little growth as cinema attendance is stagnant, TV production also has zero growth but cable TV subscription still enjoys a moderate growth. Viacom has the biggest market share of 23.3% in the slowest growing TV production subgroup.
Viacom Inc. (VIA) is an entertainment content company which has operations worldwide. The company connects with audiences through compelling content on television, motion picture, the Internet, and mobile platforms through various entertainment brands. It operates in two segments, Media Networks and Filmed Entertainment, with Media Networks contributing 60% of the total revenue. National Amusements Inc. (NAI) is a private investment arm of Sumner M. Redstone, chairman and founder of Viacom. NAI has voting control over the sister companies, Viacom and CBS. Viacom directly competes with companies including CBS, Comcast, Walt Disney, News Corp and Time Warner. Viacom has been investing heavily in programming, growing its film entertainment business and expanding its global presence by partnering with new television networks. The company has very strong products in its TV and movie production pipeline. However, some financial aspects of their company seem dubious. Goodwill books 48% of its total assets, they repurchase stocks when the stock price is high and started paying dividend in 2010 mainly due to lack of good investment opportunities.
Because of the dual-class issue, the Dividend Discount Model (DDM) was used to value Class B stock. The implied growth rate was found to be 3.98% which gives us a stock value of $38.33. VIA-B closed at $44.76 on November 30, 2011.
Their products are well-received, evident from high viewership ratings and box office sales. However, taking into consideration the competitiveness and low growth potential in the entertainment and media industry, as well as management’s share repurchase plans, our group recommends keeping Viacom on the watch list.