08:26am EDT 4-Aug-00 DLJ Securities VIACOM: Better than expected results, raising target price to $85
VIACOM (VIAB: $71)
Better than expected results, raising target price to $85
Range: Earnings Per Share 2000 vs 1999 % Chg
71-38 Old New P/E Ratios F1Q$ NM vs NM
(FY:Dec.) 2001E $ $NM NM F2Q NM vs NM
2000E NM NM F3Q NM vs NM
1999A F4Q NM vs NM
Yield: 0% Market Cap.: $105,674 5-Yr. Growth Rate: 18%
Dividend: $0 Avg. Trading Vol.(000): 2,791 Book Value: $NM
RATING: Top Pick Change: None 12-Mo. Target: $85
VIEWPOINT
Viacom's second quarter results (which were in excess of our estimates)
have solidified our belief that this stock is becoming a must own for
media/entertainment investors. EBITDA growth remains exceptionally strong,
with free cash flow growth even stronger. Moreover, with 50% of its revenue
being generated from advertising and the majority of its assets positioned
in the fastest growing segments of advertising (radio, outdoor and cable
television) we continue to see future strength in Viacom's upcoming
quarters and into next year. The benefits of the strong advertising market,
coupled with the ongoing synergies in filmed production, cable television
and television station duopolies provides additional potential for even
stronger results.
As a result of the recent quarter and our expectation for continued growth,
we are raising both our 2000 and 2001 EBITDA estimates and have raised our
target price to $85 per share (20% upside from current levels). Our new
2000 EBITDA estimate is $5.4 billion, up from $5.3 billion. For 2001, we
have increase our EBITDA forecast to $6.6 billion from a prior estimate of
$6.3 billion, an increase of 22% from our 2000 estimate. Our new price
objective is based on Viacom shares trading at 20-21 times 2001 EBITDA
(adjusted for the percentages of Infinity and Blockbuster it does not own).
This multiple target is roughly a 10-15% premium to our projected 18% 3-5
year growth rate. Affording Viacom a premium multiple is based on two main
factors. First, we continue to believe its assets are best positioned to
capitalize on the current robust advertising market (which we expect to
remain solid in 2001 despite the loss of Olympics and political spending)
and see tremendous benefits from the integration of CBS and Viacom which
will provide a distinctively unique and diversified advertising buy.
Second, while EBITDA multiples are the standard for entertainment
valuation, looking at Viacom from a free cash flow perspective shows that
it is actually one of the cheapest in the group. We continue to rate Viacom
as our top pick with a new target price of $85.
IMPORTANT POINTS
Viacom's total pro forma EBITDA increased 18% in the second quarter to
$1.20 billion vs. $1.02 billion last year. Results were driven by strong
EBITDA growth at Cable Networks (up 22%), Television (up 48%) and Infinity
(up 24%).
1. Cable Networks EBITDA increased 22% to $353.3 million, up from $289
million last year and in line with our estimate of $353.2 million. Results
from the Cable Networks were strong, driven by impressive advertising gains
at MTV Networks (EBITDA up 23%) and higher DBS revenues/ subscriber growth
at Showtime Networks (EBITDA up 17%). MTVN achieved 26% higher worldwide
advertising revenue during the quarter, increasing total revenues by 18% to
$739 million and EBITDA by 23% to $308 million. Total MTVN subs increased
10% to almost 580 million (up from 527 million) driven by 16% growth at
Nickelodeon worldwide. Showtime Networks increased subs by 9% to 24.2
million (up from 22.3 million). Showtime's revenues and EBITDA increased
8% and 17%, respectively.
Cable Networks reflect a $5 million purchase price accounting charge
related to the CBS merger and the incorporation of The Nashville Network
and Country Music Television into the group.
Going forward, we expect results at the cable group to remain strong and
expect to see significant improvement in both of the acquired CBS
assets. CMT has tremendous opportunity to benefit from the music
television expertise of both MTV and VH-1 to grow that business.
Moreover, TNN with the planned addition of WWF wrestling should leapfrog
in the ratings.
2. Television EBITDA increased 48% to $346.7 million, up from $234.5
million last year and above our estimate of $308.1 million (12.5% higher
than our forecast). Television results increased dramatically during the
second quarter, led by gains at the CBS Network and the Paramount/CBS
Stations. The group benefited from continued strength in the national and
local advertising markets, the airing of the NCAA Final Four Championship
Tournament during the quarter and improved margins at owned and operated
stations. Although CBS ratings have been riding high on the success of
Survivior, the show's popularity had a minimal impact on quarterly results
because most ad time was sold in advance of its successful debut in order
to insure a modest profit. What Survivor has been able to do is lower the
overall age of the CBS viewer, attracting a much larger percent of the
desired 18-49 demographic. Survivor has had a "halo" affect on other shows
which has contributing to this trend toward a younger demographic. We also
believe the post-Super Bowl airing of Survivor II is likely to have a
significant positive impact on Q1 `01 results.
Television is another significant area at Viacom that should benefit
tremendously going forward from the merged company. The six duopoly
markets created by the merger (VIA is including Baltimore/D.C) have the
potential of both enhancing advertising selling while simultaneously
lowering cost and therefore significantly enhancing margins. We believe
that the television station group is one that will benefit tremendously
from Mel Karmazin's leadership and experience.
3. Infinity EBITDA increased 24% to $457.6 million, up from $368 million
last year and above our estimate of $440.3 million (+3.9% above our
forecast). Infinity results were better than expected due to the continued
strength in the national and local advertising markets and strong revenue
gains at Radio and Outdoor. Infinity completed its acquisition of two
radio stations in San Antonio, Texas and Giraudy, one of France's largest
outdoor advertising companies. Infinity also acquired Italian outdoor
media sales company Societa Manifesti & Affissioni S.p.A. during the
quarter. Please see DLJ Broadcasting Analyst Geoff Jones' August 3 note,
Second Quarter Results In-line with Estimates; Proforma Revenue up 18%, Led
by 20% Radio Growth, for more detail.
4. Entertainment EBITDA increased 16% to $114.4 million, up from $98.8
million last year and modestly below our estimate of $119.4 million (-4.2%
below our forecast). Entertainment results improved primarily due to the
successful theatrical releases of Mission: Impossible 2 (grossing $431
million worldwide, $211 million domestic), Shaft ($61.8 million domestic)
and Rules of Engagement ($61.2 million domestic). Results were slightly
below estimates due to a $15 million charge related to Viacom's early
adoption of a new motion picture accounting standard (Statement of Position
00-2). The standard includes changes in revenue recognition and accounting
for advertising, development and overhead costs.
5. Video EBITDA increased 8% to $113.2 million, up from $104.5 million
last year and slightly below our estimate of $114.6 million (-1.2% below
our forecast). Video (Blockbuster) results were strong versus last year,
driven by increases in the number of company-operated stores, same-store
sales growth of 11%, and improved cost containment at the store and
corporate levels. Blockbuster closed the quarter with 7,367 stores, up 11%
vs. last year. Segment results also included a $13 million loss related
Blockbuster's online operations.
Blockbuster continues to try and diversify its long-term revenue stream,
positioning itself as an entertainment hub for movies, by courting the
eventual video-on-demand market. Most recently, Blockbuster signed a deal
with Enron whereby Blockbuster's entertainment services will be delivered
through the Enron Intelligent Network. Enron will store and stream movies
for major telecommunication providers SBC and Covad and other distributors
who will deliver the content through high speed digital subscriber lines to
set-top boxes in customer's homes. While we are still uncertain how
successful this strategy will be, Blockbuster clearly needs to diversify
away from the potential of a drastically reduced video rental market down
the line.
6. Publishing EBITDA decreased 50% to $8.5 million, down from $16.9
million last year. Publishing results were down significantly during the
quarter due to a tough 1999 comparison created by the timing of major title
releases in the Pocket Books and Trade divisions. Best selling titles
during the quarter included Before I Say Goodbye by Mary Higgins Clark and
Soul Stories by Gary Zukav.
7. Online EBITDA loss widened to $83.3 million from loss of $5.2 million
last year - better than our loss estimate of a $90 million. Online results
were generally impacted by increased investment in technology and
personnel-among other costs commonly associated with new online businesses.
Revenues for the group more than tripled during the quarter (rising 266% to
$28 million), driven by increased advertising sales across Internet
properties. The MTVi Group remained a top online entertainment destination
during the quarter, and attracted 4.7 million unique visitors in June
alone. Unique visitors to iWon.com have increased sharply since launching
in October of 1999, and reached 8.5 million in June.
Other operating points include:
ú Goodwill of approximately $50 billion related to the CBS merger is
being amortized on a straight-line basis over the estimated useful asset
lives not to exceed 40 years.
ú Total charges in the quarter totaled nearly $1.5 billion. Roughly $700
million related to the merger and $800 million related to new accounting
laws requiring VIA to restate the carrying value of film library titles. |
