) filmed entertainment arm, Paramount Studios, is now set to enter
television production. The company will be making a TV show based
Beverly Hills Cop
movie series which was released during the 1980s and 1990s. The
movie series revolved around a loudmouth, humorous cop and had good
entertainment value. There is a good chance that the TV series will
garner a healthy audience and give a kick-start to Viacom's TV
production business. It makes sense for the company to diversify in
this way for a couple of reasons.
First, the TV business has higher margins compared to movies. We
note that Viacom's Paramount Studios' EBITDA margin (earnings
before interest, taxes, depreciation and amortization) has stayed
below 6% for the past few years. It is normal for the movie
business to have substantially lower margins compared to the media
networks business. DVD sales have been under pressure and margins
tend to fluctuate depending upon the success of individual movies.
However, in the case of Viacom, low margin appears to be a chronic
phenomenon. In 2011, when Paramount topped worldwide box office
sales, its EBITDA margin was just 4.3% - substantially below that
of Disney Studios or Warner Brothers. Viacom could fill this gap by
venturing into television production.
See our complete analysis for Viacom
Second, there is a growing demand for good quality content. This
demand is not just coming from cable and broadcasting networks but
also from streaming companies that are increasingly looking to
acquire original content. In addition, there is potential for
syndication in international markets where demand for pay-TV is
rising. A classic example is Warner Brothers Television Group which
has created a very successful business.
We estimate that Time Warner's television production and
licensing business is 2 to 3 times as valuable as its movie
business. If Viacom can replicate the success of Warner Brothers
Television group in a way where its TV production and licensing
group becomes twice as valuable as its movie business in the long
term, there could be as much as 15% upside to our current price
Our price estimate for Viacom stands at $67
, implying a discount of more than 10% to the market price.
How a Company's Products Impact its Stock Price at