07:42am EDT 21-Jun-00 PaineWebber VIA CBS
Viacom: Superbly Positioned -- Raising Target Price to $80
KEY POINTS
* Raising price target to $80 from $68 and increasing EBITDA numbers and
multiples at Viacom based on superb fundamentals, strong ratings results for
"Survivor" and the powerful box office performance of Shaft and MI-2.
Confirmation of continued strength in advertising bodes well for Viacom's CBS
television network, its radio properties and its cable network business.
CBS, for example, is enjoying an increase of 16% in its upfront TV
advertising rates and a shift to younger demographics resulting from the
reality-based game programming can result in an estimated 25% increase in
scatter market pricing at the network and improved operating results at CBS
owned-and-operated stations.
* Increased marketing spending and the rising importance of brand building for
major consumer companies in an increasing dynamic marketplace should fuel
estimated 24% free cash flow growth in 2001 before significant operating
synergies or write-downs across Viacom's television, cable, radio and outdoor
platforms. Current estimate total EBITDA before corporate of $5.2 billion in
2000 goes to an estimated $6.3 billion in 2001. Attributable EBITDA (net of
minority ownerships in Infinity and excluding video) goes to $3.9 billion in
2000 growing to $4.9 billion in 2001.
* Proven ability to extend the MTV and Nickelodeon brands internationally
should further enable the company to participate in the rapid expansion of
international multi-channel television outlets in coming years.
* A pristine balance sheet, and ongoing share repurchase program, should result
in higher returns on equity as company seeks to shrink capital base against
rapidly growing cash flow. Current estimate for year-end net debt of $2.6
billion is expected to move to the positive column with estimated $1.17
billion in net cash by 2001.
* A portfolio of Internet assets ranging from CBS Sportsline, to CBS
Marketwatch and MTVi provides a place hold as the 'net develops into a mass
medium. MTVi's initial public offering is scheduled to debut on the Nasdaq
exchange as soon as the IPO environment improves.
* We reiterate our Buy rating on VIA & VIAB shares with a new 12-month price
target of $80 (20% above current levels), derived from a sum-of-the-parts
analysis; increasing 2001 EBITDA estimate to $4.86 billion, an increase of
24% from 2000 with cable networks (MTV), radio & outdoor, and entertainment
divisions being the main drivers.
Key Data Quarterly Earnings Per Share (fiscal year ends
December)
52-Wk Range $71-39 1999A 2000E Prev 2001E Prev
Eq.Mkt.Cap.(MM) $9,334 1Q $0.08 $0.11A
Sh.Out.(MM) 137.5 2Q 0.08 E
Float 32% 3Q 0.16 E
Inst.Hldgs. 23.9% 4Q 0.19 E
Av.Dly.Vol.(K) 242 Year $0.58 $0.80
Curr. Div./Yield None/NA FC Cons.: NA NA NA
Sec.Grwth.Rate NA Revs.(MM): NA NA NA
12-mo. Tgt Price $80.00 P/E: 117.0x 84.9x NM
12-mo. Ret. Pot'l 17.9%
Convertible? No
INVESTMENT OPINION
The closing of the merger between Viacom and CBS has created a media
juggernaut, superbly positioned to post above-trendline cash flow growth for
the next several years. Quite simply, with over 20% of the available
advertising inventory in radio, outdoor, cable television and broadcasting, the
new company can become a one-stop shop for advertisers looking to build and
protect core brands. As we believe most consumer companies will be compelled
to increase marketing budgets in an increasingly complex and fast moving
marketplace, the new Viacom is well positioned to benefit and to post
accelerating cash flow growth for many years to come.
Importantly, with the notable exception of the company's production units, each
of the new Viacom's business units has extraordinary operating leverage.
Radio stations, television networks, and TV stations all have relatively fixed
costs. This means that as new revenues develop a disproportionate amount of
cash drops to the bottom line. When combined with the maturing of early stage
international ventures and Internet activity, we estimate the new company can
generate in excess of 18% free cash flow growth over the next five years.
In production, the combination of King World, Spelling, Paramount and CBS's in
house production unit is expected to mitigate the inherent volatility
associated with creating television programs and films. The sheer scale
represented by the combination of the leading first run syndicator with a
successful off network supplier can generate sufficient cash flow to fund
production and continue to expand the studio's library; assuring Paramount a
seat at the table as new distribution media like digital video disks and
international television platforms continue to expand.
The net result is that Viacom is well positioned to post accelerating,
diversified cash flow as marketers increase spending and as new technology
creates increased demand for American entertainment and television programming.
A proven shareholder friendly management team, should be able to solve the
inevitable integration issues that will arise between the Viacom and CBS
cultures; and help individual operating units focus on driving, and where
necessary, improving returns. Across the company, a strong balance sheet, and
commitment to shrinking capital can result in even higher returns on equity.
We reiterate our Buy rating on VIA/VIAB with a new price target of $80.
RISKS
Expanding multiples and downturn in the advertising market which we do not
anticipate.
Additional information available upon request.
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