UBS Lowers Estimates and Price Target on Viacom

The firm believes that worsening advertising trends and operational and cash flow risks are likely to keep a lid on the shares of Viacom.


From Analyst Michael Morris:
Our Neutral rating on Viacom reflects both near-term cyclical and longer-term
structural concerns for the company. In the near term, we believe that weak
consumer spending and credit environments will continue to depress advertising
spending at the cable networks (52% of operating income), and the decision to
reduce the company’s film slate in 2009 will drive higher risk and lower
operating income. Over the longer term, we do not believe the company has a
tenable strategy to fight ratings erosion, which will drive underperformance in
advertising growth relative to peers.

We view it as unlikely that advertising trends will reverse themselves in the
absence of a stronger economy and that Viacom would be one of many
companies whose shares could appreciate significantly in an economic rebound.
At this time we have no indication that an improvement is imminent. In
addition, we view the company as having a relatively weaker balance sheet than
most media peers and an unfavorable ownership structure that features dual
class shares, with the voting class 81% controlled by Sumner Redstone.

Operating Results, Commentary Provided Little Reason for Optimism
In particular, the advertising environment remains weak and is “likely to get worse
before it gets better.” We are now estimating an -8% domestic advertising revenue
decline in 1Q09 versus our prior -5%. For the full year we estimate -9.4%
domestically versus our prior -7.3%. Ratings at MTV and VH1 showed sequential
improvement but remain down year over year.

Attractive P/E Ratio Masks Operational and Cash Flow Risks
We believe that simply using at estimated 2009 P/E overlooks 1) higher relative on
and off balance sheet risk versus competitors and 2) risk of continued weakening in
operating trends. We expect ~$3bn in fixed obligations to come due through 2011,
and see FCF declining to $925mm in 2009 from $1.52bn in 2008. Ratings
weakness, and Film and video game challenges have not been resolved.

Lowering 2009 EPS to $1.85 from $1.99 to Reflect Weaker Ads & Film
We have lowered our worldwide advertising growth estimate for 2009 to -9.2%
from -3.8%, based on current trends and F/X risk. We now expect Media Networks
op inc to fall 12.2% in 2009 and Filmed Entertainment op inc to fall 9.7%. The net
impact these changes is a revised 2009 EPS of $1.85, from $1.99, which reflects
lower op inc and the suspension of share repurchases.

Valuation: Lowering 12-month price target to $17 from $18
Our 12-month PT is based on DCF analysis (10.8% WACC and 2.5% LT growth)
and forward P/E models (9.0x 2009).