By Matt Doiron
Viacom (VIAB) recently reported its results for the third quarter of its fiscal year (the company has a September fiscal year end), with adjusted earnings per share results roughly in line with consensus. The stock rose 7% in morning trading, however, on the news that the current repurchasing program has been increased to $20 billion - more than half the current market capitalization of $38 billion - with an intention to buy back about $2 billion worth of shares in the near future. Viacom is a major player in cable TV- its channels include Nickelodeon, Comedy Central, and MTV - and it also has a film business which includes the Paramount name.
Viacom had reported over $1 billion in EBITDA in its most recent quarter, and has taken in nearly $3 billion so far this fiscal year. Cash flow from operations has been $2 billion, and with little capital expenditures essentially all of it has gone into buying back shares. The company finished the quarter with $1.1 billion in cash and cash equivalents on its balance sheet. As a result, chances are that the company will take advantage of current interest rates (which have risen a bit in the past few months, but are still low in historical terms) and borrow in order to finance such a large buyback program.
The company had recorded a 14% increase in revenue during the quarter compared to the same period in the previous fiscal year, with earnings rising at a 20% rate; that latter figure is essentially in line with what Viacom had done in the first half of the FY. The stock is valued at 15 times forward earnings estimates, and we would imagine that EPS forecasts will be raised based on the steeper reduction in share count that had previously been expected.
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Two other entertainment companies with significant cable network assets are Time Warner (TWX) and Disney (DIS), which draws a good deal of its valuation from ESPN and other cable properties. Time Warner has been reporting double-digit growth rates in operating and net income compared to a year ago, though in that company's case this is entirely due to cost cutting: revenue was actually down according to its most recent quarterly report. Wall Street analysts expect earnings growth to continue over the next year, and so it trades evenly with Viacom at a forward P/E of 15; however, we would be wary of counting on high profits growth solely from wider margins. Disney, possibly because of its stronger brand name and the possibility for its recent Marvel and Lucasfilm acquisitions to drive future growth, is valued at a premium to these two companies on a forward earnings basis with a P/E multiple of 17. It is has been experiencing decent growth on both top and bottom lines, with earnings up 11% in the first half of its fiscal year from their levels a year ago.
Viacom's business is doing well, and conditions in the rest of the cable TV business seem strong as well. As a result it makes some degree of sense for a company focused on that industry- it provides essentially all of Viacom's segment income, with the film business about breaking even- to leverage up a bit. In combination with an annual rate of CFO of more than $2.5 billion, it will take some time to repurchase $20 billion in shares and it does seem a bit more aggressive than would be optimal, but certainly if the company can lock in low interest rates and it has no better use for this cash then the general strategy here appears wise.