Viacom: Solid Execution Vs. Remaining Challenges

Viacom, Inc. (NASDAQ:VIA) shares fell steeply last Friday in reaction to its fiscal third-quarter results released Thursday after the market close.

Against the backdrop, UBS discussed the solid execution of the company and the remaining challenges it faces.

Solid Execution

Analyst Doug Mitchelson noted that Viacom reported better than expected results, with revenues $37 million ahead of estimates, EBIT $48 million ahead of estimates and earnings coming in 13 cents ahead of estimates at $1.17 per share.

However, the analyst noted that U.S. core affiliate revenues came in flat, with the company guiding fiscal fourth-quarter core revenues to be flat too compared to the firm's estimate of 3-percent growth.

UBS sees this as an indication that the U.S. affiliate growth momentum has shifted. The management indicated that rates rose 4 percent even as subscribers fell 3.5 percent. As against UBS's expectations for a 2.2 percent drop, U.S. ad revenues declined a more modest 1.6 percent. The management guided to a similar drop or a 2-percent decline in U.S. ad revenues in the fiscal fourth quarter.

UBS also noted that the company highlighted improving ratings at MTV and BET, although it said a 3-percent reduction in commercial loads by the management led to weakness in advertising.

See also: Viacom's Downgrade Amid Mounting Top-Line Pressures

Looming Challenges

UBS thinks investors would be disappointed in the current revenue trends and the time required for the turnaround to take hold, given that U.S. affiliate revenues are not growing and advertising is continuing to decline.

For the outlook to improve, the firm thinks the company has to execute on its ratings turnaround, successfully effect affiliate renewals, deliver on its 2018 EBITDA growth and strengthen its balance sheet to the point of it being able to make possible capital returns.

According to the firm, EBITDA growth can be achieved by offsetting any U.S. networks revenue shortfalls with cost cuts, pursuing international growth and improving losses at Paramount.

Lowering Estimates

UBS lowered its 2017 EBITDA estimate by $87 million to $3.132 billion and 2018 estimate by $96 million to $3.307 billion. The firm also lowered its 2017 and 2018 earnings per share estimate by 8 cents each to $3.87 and $4.19, respectively.

As such, UBS maintains its Buy rating on the shares of Viacom but lowered its price target for the shares from $50 to $45. At time of publication, shares of Viacom were up 3.31 percent at $31.22.