(VIAB) Viacom Analyst Remains Neutral on Shares

Buoyed by higher revenues, increased margins and continuous share repurchases, Viacom Inc. (VIAB) easily outpaced the Zacks Consensus Estimates in the second quarter of fiscal 2012. Revenue from the company’s cable network fees and digital licensing of TV programs and movies increased significantly. An improving U.S. economy together with Viacom’s disciplined management team continue to make us optimistic about the company’s future growth prospects.

However, advertising revenue remains more or less flat in the previous quarter despite a sound ad-spending atmosphere, primarily resulting from serious concern regarding the weak viewership rating of Viacom’s flagship channel Nickelodeon. Similarly, customers’ responses to new box-office releases of Paramount Pictures were lukewarm. Despite this, effective cost control helped the company to raise operating margin of this segment. We expect Paramount to perform much better in the future reporting quarters as the company is gradually revamping this segment.

Viacom immensely benefits from its agreement to distribute digital content to online video streaming companies, such as Netflix Inc. (NFLX) and Hulu. Management is hopeful that it will able to expand its digital content distribution deals, both in the U.S. and internationally in the near future. Viacom also entered into a similar kind of agreement with Amazon.Com (AMZN).

Nevertheless, the cable TV industry in the U.S. is highly matured and saturated. Viacom’s flagship cable channels are already distributed and therefore chances are much limited to increase revenue by enlarging distribution channels. This reflects the company’s need to sequentially improve its cable channels ratings to boost its top line. Simultaneously, Viacom must diversify its geographic presence in order to compensate the saturated domestic market.

We reiterate our Neutral recommendation on Viacom.

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