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October 31, 2005

Viacom Third Quarter Earnngs Preview

Viacom (VIA/VIAb) reports before the open on Tuesday. Most investors are looking ahead to the split of the company that will occur at year end but this report could provide some insights on how the two new parts may perform right out of the chute as this is probably the last report as a combined company.

Estimates for VIA have fallen steadily all year in the face of sluggish advertising growth. Among major media companies, VIA has the greatest exposure to advertising at just under 50% of revenue. I surveyed analyst estimates focusing on segment level numbers and found little variation in expectations with the expectation of the volatile Entertainment segment that contains the Paramount movie studio. Overall, revenue is expected to grow 6-7% and EBITDA is expected to rise 4-5%....

Like many media companies, VIA now produces EPS. For 3Q consensus EPS estimates are 45 cents against 42 cents a year ago. For 2005, the consensus EPS estimate is $1.73, putting the shares at about 18 times current year estimated earnings. Although it will never be reported, for 2006 the consensus EPS estimate is $1.98.

In the third quarter the strongest segment will be Entertainment due to the box office success of War of the Worlds. The film was released on June 29th putting most of its revenue in 3Q but leaving P&A expenses mostly in 2Q. In other words, a lot of very profitable revenue is hitting in 3Q. EBITDA estimates for the segment vary widely, ranging from $65 million to $95 million.

Cable Networks will also show above corporate average growth with EBITDA likely rising almost 10%. I've written several times recently about my fears that cable network growth is slowing more than the Street is thus far willing to admit. Guidance commentary on cable networks will be an important factor in the future performance of the stock.

Radio is expected to continue its struggles with revenue and EBITDA each rising plus or minus 1%. Television will be a drag due to tough comparisons against political advertising and syndication revenue in the year ago quarter. Analysts are looking for EBITDA to decline between 11% and 15%.

VIA shares are trading at historically low multiples of EBITDA near 8 times current year estimates. Personally, I find this attractive given the high free cash flow, low capital intensity nature of the company's assets. The issue, however, is growth not value and until it becomes apparent that advertising growth in traditional media is ticking up, I think VIA shares will be frustrating to own.

Posted by Steve Birenberg at October 31, 2005 02:06 PM in Viacom