Seeking Alpha
Long only, value, contrarian, dividend growth investing
Profile| Send Message|
( followers)  

Viacom (NASDAQ:VIAB) is an entertainment company which operates under two business segments: Media Networks and Filmed Entertainment. Some of the media networks owned by Viacom include Nickelodeon, MTV, VH1, CMT, BET, Comedy Central and SPIKE. The company also owns Paramount Pictures, which falls under the Filmed Entertainment segment. Viacom has quietly become a cash cow generating over $3 billion a year in free cash flow. Management has made their top priority returning value to its shareholders through its share buyback program and dividend structure. In FY2013, Viacom returned $5.4 billion to shareholders through share buybacks and dividends.

Share Buyback Program

On August 1, 2013, the company announced they would increase their stock repurchase program from $10 billion to $20 billion. From FY2011 to November 11, 2013 the company repurchased $10.37 billion in stock, resulting in 188 million shares removed from the market. In FY2014, Viacom expects to repurchase $3 billion, or roughly 7-9% of total market cap. The company will continue this repurchase rate of roughly $3 billion a year for at least the next 3 years.

(click to enlarge)

By removing 7-9% of outstanding shares annually, Viacom continues to create attractive valuations over the next several years. Viacom stands out particularly when compared to its peers.

Viacom vs. Peers

Company

P/E (NYSE:TTM)

P/E (fwd.)

1 Year EPS Growth

Div. Yield

Viacom

17.9

15.4

16.1%

1.42%

Disney (NYSE:DIS)

22.3

19.1

16.3%

1.70%

21st Century FOX (NASDAQ:FOXA)

22.5

20.1

11.8%

0.77%

Time Warner (NYSE:TWX)

17.4

16.4

6.5%

1.76%

CBS Corp (NYSE:CBS)

21.1

18.3

15.2%

0.79%

Peer Average

20.24

17.86

13.2%

1.3%

Looking at the forward P/E ratio, Viacom appears to be significantly undervalued compared to its competitors. With a peer average forward P/E at 17.86, Viacom is trading at a 15% discount ((15.4-17.86)/15.4)=15.9%). As a result of its share buyback program and positive revenue growth in media networks and filmed entertainment, the company expects strong EPS growth in 2014.

Revenue Growth

Quarter Ended 9/30/13 (millions)

Y/Y % change

FY2013 9/30/13 (millions)

Y/Y % change

Media Networks

$ 2,460

7%

$ 9,656

5%

Filmed Entertainment

$ 1,208

11%

$ 4,282

-11%

Total Revenue

$ 3,652

9%

$ 13,794

-1%

Expenses

$ 2,344

-5%

$ 9,487

1%

Operating Income

$ 1,213

16%

$ 3,942

1%

Free Cash Flow

$ 1,046

45%

$ 3,020

27%

EPS

$ 1.55

28%

$ 4.68

11%

In 2012, Viacom redoubled efforts to return ratings momentum to its media networks. By investing in programming to fuel new shows, diversifying producers and creative partners and refining scheduling to engage audience connections, the company found success which led to a year-over-year ratings increase in nearly every Viacom owned network. SPIKE recorded its highest quarterly ratings in 3 years and MTV2 recorded its highest rated quarter ever, as new original programming has found success. In addition, Viacom's flagship network, Nickelodeon, achieved its highest year-over-year ratings improvement in 16 years. October marked Nickelodeon's ninth straight month of year-over-year ratings growth. Viacom expects this ratings growth to continue as it launches more and more original episodes across its basket of networks.

Even though Viacom's Paramount Pictures saw negative yearly growth in FY2013, the company had a solid 4Q2013 and a strong FY 1Q2014 launch.

Movie: FY 1Q2014

Debut

Budget (est.) millions

Box Office total through 1/13/14 (millions)

Jackass: Bad Grandpa

10/25/2013

$ 15

$ 101.80

Anchorman 2

12/18/2013

$ 50

$ 118.70

Wolf of Wall Street

12/27/2013

$ 100

$ 79.50

The Wolf of Wall Street will continue with to rack up strong revenue and will likely win Best Picture. Paramount Pictures is set to release several strong movies in FY2014 including Transformers: Age of Extinction, Noah, Teenage Mutant Ninja Turtles, and Hercules. FY2015 has a strong lineup as well with Mission Impossible 5, SpongeBob Square Pants 2, and Terminator: Genesis.

Conclusion

Many analysts saw Viacom's massive share buyback program as a way to hide flat to negative revenue, but Viacom has proven it is very much alive and well. In the past 2 quarters the company has seen a steady increase in revenues and its strategy in its media network segment continues to show results. Most importantly, free cash flow increased 27% in FY2013 to over $3 billion and EPS grew 11%. With $2.4 billion in cash at the end of FY2013, the company is on solid financial ground. Through its massive share buyback program, the company will see 7-9% share reductions annually through 2016. As a result of the dwindling outstanding share count, any growth in revenue or expense savings will magnify EPS growth. To top it off, Viacom's forward P/E is the lowest among its peers and is trading at a 15% discount.

Source: Viacom Quietly Becoming A Cash Cow