Is Viacom Really An Ailing Company?

| About: Viacom Inc. (VIA)

Summary

Viacom reported a mixed FQ1 earnings report with EPS in line with estimates.

The stock plunged to new multi-year lows despite some positive turnaround signs.

The company trades at an incredibly low multiple of cash flows, and now offers a substantial 5% dividend with strong coverage.

News headlines, including this one from Fortune for the FQ1 earnings report of Viacom (NYSE:VIA) (NASDAQ:VIAB), included the message that the company is somehow ailing. With all of the stress in energy companies and bank stocks, one has to wonder if an extremely profitable media company is somehow sick.

The stock ended down over 21% on the quarterly results where earnings matched expectations and revenues missed expectations. With the stock at new 52-week lows, is there any reason for even an ailing stock to trade down this much?

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Don't Panic

Similar to the recommendation when the stock collapsed back in December, my advice is to not panic on the stock now. The drop to $32 is based on panic and a complete lack of knowledge surrounding the turnaround story. Clearly, the market saw the revenue miss as a sign of the digital shift though Viacom is actually closer to reversing the negative advertising trends.

Viacom has already turned around several cable networks including Nickelodeon, VH1, Spike and BET with big hits like Lip Sync Battle and Love & Hip Hop. The company has seen dramatic ratings increases in these networks and now needs to finish the turnaround with Comedy Central and MTV.

Source: Viacom Q1'16 earnings highlights

In fact, domestic ad sales were positive outside of the two networks still in the turnaround process. The rate of change is also better with domestic ad sales down 4% in FQ1 versus down 7% in the prior quarter. Not to mention, Viacom completed a deal to integrate the ad sales of Snapchat (Private:CHAT) into the current ad machine.

The company has a turnaround firmly in place that doesn't mirror the stock action.

Free Cash Flow Machine

While Viacom isn't about to produce explosive growth, the company is far from ailing that suggests some sort of death or financial distress. Last fiscal year that ended in September, the media company produced $2.3 billion in free cash flow. The company wasn't even firing on all pistons with weak revenues from films and domestic advertising under massive pressure.

The stock is only worth $13 billion after the incredible $9 loss on Tuesday. With roughly 398 million shares outstanding, Viacom lost about $3.6 billion in value for the day.

The stock now offers a 4.9% dividend yield with absolutely no signs that profits are doing anything but flattening at the $5.50 level of FY15. The payout ratio is a meager 30%.

If anything, the biggest issue is the Filmed Entertainment division that had a weak quarter with a sizable $146 million loss, up substantially from prior-year levels. With Paramount Pictures set up for some sizable releases this year, including success at the end of December, the movie division is set for a rebound to stem the losses from this division.

Takeaway

The key takeaway is that Viacom is struggling to generate revenue growth, but the company is far from ailing. The recent push towards better content in the cable networks, along with a tie into digital offerings, has the media company set for stable numbers going forward.

The recommendation is to load up on the stock trading like the company is sick that is instead generating strong cash flows and paying huge dividends.

Disclosure: I am/we are long VIAB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.