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May 10, 2006

Viacom Earnings Preview: Forget Tom Cruise, Cable Networks Are Key

Viacom (VIAB) is expected to report weak 1Q06 results due to tough comparisons in 1Q05. Revenue growth is forecast at about 5% with EBITDA rising just 0-2%. Despite the weak start to the year, analysts expect revenue and EBITDA to grow by low double digits for all of 2006. 1Q EPS are expected at 39 cents and 2006 EPS are currently forecast at $1.96.

Management has made it pretty clear that 1Q will be tough so I don’t expect a lot of concern unless the results are a lot worse than expected. I do think there will be a lot of discussion about the full year outlook. Analysts will wonder about Paramount, just 30% of revenue, following the disappointing domestic opening of Mission: Impossible 3. I don’t see any more major releases for Paramount this summer besides the distribution deal for Over The Hedge.

More important is the outlook for cable networks. VIAB's cable networks are considered the best in the business due to their younger demographics and generally consistent ratings. These networks are presumed to be worth a premium to other company's cable network assets and to other media assets. Any reduction in growth expectations is a double whammy because it would pull lower the lion's share of VIAB's profits and lead to multiple contraction....

I have been concerned about contracting multiples for cable networks because the industry has matured in the US. New network launches are difficult, the major networks are now fully distributed in the cable and satellite universe, and ratings gains for cable as a group are beginning to slow. In fact, the first generation networks like MTV, Comedy, and VH1 have basically shown flat ratings for several years as niche networks provide audience growth. So instead of the booster shot from growing distribution, growing ratings, rising CPMs, and rising affiliate fees, revenues are now driven by rising affiliate fees and rising CPMs.

VIAB and E.W. Scripps (SSP) are the cable network plays on the street and both stocks have seen significant multiple contraction in the past year. Multiples are now around 9-10 times 2007 estimates although many sum-of-the parts valuation models still use 12-14 times for cable network values. Cable networks deserve a premium because they still offer superior growth to other media assets and they have a dual revenue stream. However, until investors gain confidence that double digit growth long-term growth remains likely, I don’t see multiples expanding.

VIAB will be the determinant of investor attitudes toward cable network assets. 1Q06 won’t mean much because revenue grew in the mid-20% range a year ago. Consequently, the key thing to listen for on the conference call is the 2006 outlook for full year growth and any commentary about 2007 and beyond.

Posted by Steve Birenberg at May 10, 2006 01:58 PM in Viacom