On Aug 29, 2014, we issued an updated research report on
Viacom has delivered positive earnings surprises in three of the
four quarters last year, with an average beat of 3.61%. The company
reported weak financial results in the third quarter of fiscal 2014
with both the top and the bottom line missing the Zacks Consensus
Meanwhile, Viacom largely benefits from its agreement to
disribute digital content to online video streaming companies, such
as Netflix Inc. (
) and Hulu. These businesses generate very high margins, of around
75%, while facilitating the company to significantly improve its
bottom line. Viacom also offers video-on-demand websites to
AT&T, Inc.'s (
) U-Verse customers and Time Warner Cable.
To add to the positives, Viacom boasts strong free cash flow,
enabling the company to maximize shareholders' wealth through
dividend payments and significant share repurchases. We also remain
confident of a turnaround in the company's movie business with the
recent release of "Transformers: Age of Extinction" that garnered
nearly $1 billion.
On the flipside, the cable TV industry in the U.S. is highly
matured and saturated. Viacom's flagship cable channels are well
distributed and there is limited scope for revenue generation
through channel expansion. Moreover, online video streaming
companies pose a major threat to cable TV operators in the long run
as it may not be willing to pay higher affiliate fees as Viacom's
content can be viewed online. Thus, it may result in a drop in
Currently, Viacom has a Zacks Rank #3 (Hold). Another
better-ranked stock worth considering in this sector is The Walt
Disney Company (
) with a Zacks Rank #2 (Buy).
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