Viacom: A Survivor -- and Much More

Its stock is riding high on subsidiary CBS's ratings run-up and expectations of an ad-spending turnaround during 2002

By Tom Lowry

Thousands of miles from Wall Street, location scouts are trekking the rain forests, beaches, and rugged mountains of Asia, Central America, and South America in search of the perfect locale for the next installment of CBS's hit reality show, Survivor. On Mar. 27, the network announced that it's ordering a fifth edition of the program, which will be broadcast this fall.

Back on the Street, the news of another potential ratings winner is bound to excite investors about Viacom (VIA ), CBS's parent and the best performer among media giants in recent weeks. Since the dark days of September, Viacom stock has been on a tear, up nearly 50% to about $48, vs. gains of some 13% for the Bloomberg U.S. Media Index, which comprises 44 media companies. And many analysts think the show could keep going strong a while longer.


  The buzz about Viacom is based largely on the belief that among media companies, it has the most to gain when advertising spending recovers. That's because half of Viacom's $23 billion in annual revenue comes from ads through its various outlets, including CBS, UPN, MTV Networks, radio outfit Infinity Broadcasting, and the Viacom Outdoor billboard company.

It doesn't end there. Viacom has revenue streams from cable fees -- what cable operators pay to air its numerous channels, from MTV to BET to Nickelodeon -- box-office receipts from its Paramount movie studio, videotape and DVD rental and sales from its Blockbuster Entertainment unit, and book sales from its Simon & Schuster business.

"Viacom is the best-positioned company in the sector to benefit from an advertising turnaround, which is just beginning to unfold and will gain momentum through 2002," says Jessica Reif Cohen, a Merrill Lynch media analyst who has a strong buy rating on the stock. Because Viacom is more ad-dependent than its peers AOL Time Warner (AOL ) and Walt Disney (DIS ), it has been punished more severely in hard times.


  Indeed, when the economy began to turn sour and advertisers ratcheted back on spending in the fall of 2000, Viacom quickly fell out of favor despite declarations from President Mel Karmazin that it could weather the downturn. Viacom shares fell 41% from the fourth quarter of 2000 to September 11, a much steeper decline than other media companies experienced. But Merrill Lynch's Cohen says the stock now has to room to grow, placing a 12-month target of $60 on the shares. Of the 26 analysts covering the company, 20 have buy recommendations ahead of the first-quarter results, which will be reported in several weeks.

The catalysts for the stock, says Morgan Stanley media analyst Richard Bilotti, are signs that advertising is picking up; further cost reductions at Viacom, including coordinating radio and TV sales forces; continued share buybacks (the company bought back 24 million shares for a $1 billion in 2001); and the prospect of more acquisitions, particularly of local TV stations and cable channels. Then, of course, there's the boost from higher ratings at its cable and broadcast outlets.

CBS has been one of the brightest spots at Viacom, even before executives were able to persuade David Letterman to remain as host of his Late Show. Once derided as the Depends Network for its aging audience, CBS, under CEO Leslie Moonves, in the last five years has gone from No. 3 to being neck-in-neck with long-running ratings king NBC, largely by luring a younger audience. Among the 18- to 49-year-old audience so coveted by advertisers, CBS's ratings increases have been the highest among the big networks (CBS, ABC, FOX, NBC), a 6% jump for the first 24 weeks of the season (excluding Olympics and Super Bowl coverage).


  Four of CBS's programs are in the top-10 list of highest-rated shows this season. They include CSI, Everybody Loves Raymond, Survivor, and Becker. "If you have good ratings" says Viacom Chief Financial Officer Richard J. Bressler, "the dollars will follow." Viacom's earnings growth in 2002 will be driven by 12% to 13% gains in earnings before interest, taxes, depreciation, and amortization (EBITDA, a measure by which media companies choose to gauge their performance) at the CBS Network, projects Bilotti.

While Karmazin may have been a bit too optimistic last year, executives are quick to point out that Viacom's ad revenue fell 2% in 2001 vs. an industrywide decline of 5%. But that's not prompting any new robust projections for this year. "The Street is littered with bodies of those who have called the end of the downturn too early," says Bressler.

The company is telling investors that it expects double-digit growth in 2002 EBITDA. Last year, that measure rose 28%, to $4.5 billion, on revenue growth of 16%, to $23.2 billion. Advertising at the Big Four networks is projected to grow by an average of 3% in 2002, according to investment firm Sanford Bernstein.


 Even as advertising shows some signs of recovery, the first quarter could still be tough for Viacom. On Mar. 26, Morgan Stanley's Bilotti lowered his first-quarter earnings estimates by $70 million, to $1.05 billion, because radio and outdoor advertising aren't recovering as quickly as had been anticipated. "We have said we expected our first quarter to be much the same as our fourth quarter," when revenues fell 5% vs. the same period in 2000, says Bressler. Still, the CFO says, investors see Viacom "as comfort food. If they give us $1, they know we're going to use that $1 more judiciously than others."

So far investors are betting big on Viacom's chances in an economic recovery, but a slower-than-anticipated turnaround could turn those bets bad in a hurry. In addition, consolidation in the cable and satellite industries could exert new pressure on a content provider like Viacom, because these operators would have more leverage in negotiating carriage deals with the company. Programming's escalating cost, especially in sports, is always a worry, and, of course, the continued fragmentation of TV audiences hurts Viacom as viewers are offered more channel choices through digital cable rollouts.

Viacom execs say one of their biggest challenges with Wall Street is getting investors to look at the company as more than just a media play. "We want to broaden our shareholder base and be seen as a large-cap company with big growth potential," says Bressler. To do that, Viacom is even considering shifting away from emphasizing the media barometer of EBITDA and focusing on earnings per share, a more certain indicator of the bottom line.

Viacom points proudly to its free cash flow, which is projected by analysts to be $2.8 billion this year. "This is the cash that's left over at the end of the day," says Bressler. "And it's what shareholders get to share in" when the money is used to make new investments or buy back shares. Given Viacom's recent market performance, investors seem to be telling executives free cash flow might be the glitziest lure of all.

Lowry covers media for BusinessWeek

Edited by Patricia O'Connell

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