30-Jun-00 Morgan Stanley
VIACOM: VIACOM: UPGRADING PRICE TARGETS P1
-UPGRADING PRICE TARGETS
We are revising our price targets to $80 for 2001 and $92 for 2002.
-INCREASED EBITDA ESTIMATES
Since our April report, we have revised both our 2000 and 2001 EBITDA
estimates by approximately $225 million.
-ADVERTISING TRENDS STRONG ACROSS THE BOARD
Of particular note are impressive advertising trends in radio and
international cable channels.
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STRONG BUY
Price (June 28, 2000): $ 67.00
Price Target: $80
52-Week Range: $ 70.69 - 39.94
WHAT'S CHANGED
Change of Target Price: $70 to $80
Company Description
Viacom has four consolidated segments that contain a number of businesses:
networks and broadcasting, entertainment, video stores and theme parks, and
publishing. Viacom has unconsolidated interests in several television
networks and cable channels.
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FY ending Dec 31: 1999A 2000E 2001E 2002E
EPS ($) 0.34 0.65 1.04 1.38
CEPS($) 1.20 1.95 2.27 2.66
EBITDA 4,349 5,314 6,319 7,101
P/E NM NM 64x 49x
P/CE 55x 34x 29x 25x
EV/EBITDA 26.9x 22.0x 18.5x 16.4x
Market Cap ($ m) 100,123
Enterprise Value ($ m) 116,989
Net Debt 9,548
Hidden Assets/Liabilities 3,210
Minority Interest 12,341
2000E Debt/EBITDA 1.9
Shares Outstanding (m) 1,507
Viacom: Upgrading Price Targets
Summary and Investment Conclusion
We reinitiated coverage of Viacom Inc., one of the world's largest broadcast
and entertainment companies, with a Strong Buy in April. We have structured
our coverage of Viacom as a joint venture with Frank Bodenchak, MSDW's
broadcasting analyst. We are revising our price targets to $80 for 2001 and
$92 for 2002, roughly 20 times forward EBITDA and 30 times forward cash
earnings (free cash flow). Since April we have twice increased our 2000 and
2001 forecasts. Total EBITDA is now about $225 million above our earlier
estimates. We believe that ongoing positive news flow and potential
enhancements to estimates over the next two to three years could ultimately
drive the stock toward higher valuations.
Our Strong Buy recommendation is predicated on VIA's:
- Attractive US and worldwide media assets --- a unique collection that
should provide Viacom with substantial vertical/horizontal integration
opportunities and above-average leverage in the media landscape;
- Prospects for 17--18% organic EBITDA growth (higher near-term), from both
domestic and international sources;
- Potential for upward estimate revisions given high growth assets,
international opportunities, and merger cost synergies and revenue
enhancements;
- Potential for consistently positive news flow over the next three years,
including operational and strategic improvements to Viacom's asset base;
- Capacity for free cash flow generation, with opportunities to buy back
shares or take advantage of accretive acquisition opportunities;
- Management's outstanding track record of increasing shareholder value
through exceptional organic growth and through identification of
opportunities that enhance existing strategies.
The last characteristic is the most important to our long-term thesis on the
stock given the dynamic nature of the media business. We expect that the
Viacom/CBS combination (both in terms of management and asset composition)
will be among the best-positioned companies to exploit the relatively
sizeable growth opportunities in the media landscape. We expect the new
company will also be able to respond effectively to the relatively sizeable
threats that fragmentation and new technology continually pose.
Near- and Long-Term Prospects for EBITDA Growth
Viacom produces substantial consistent EBITDA, and it appears positioned to
grow at the above-average rate of 17--22% from 2000--01, and 14--18% compound
average from 2000--05 (our models conservatively assume the low end of these
ranges). Just as important, a substantial percentage of EBITDA should be
available for debt repayment, acquisitions, or share buybacks, given the
company's low capital expenditures requirements and low interest expense.
Of Viacom's $6.2 billion in estimated 2001 EBITDA, $3.7 billion, or 60%,
comes from the radio, outdoor, and cable networks businesses, with the
highest and most stable growth rates in the media business. These are the
only three businesses in the media landscape that have room to benefit from
both strong advertising and meaningful opportunity to gain share within the
media business given favorable pricing, audience, and consolidation trends.
If we include TV station assets, the percentage of revenue from stable cash
flow businesses increases to 79%.
All of these businesses have very attractive operating leverage
characteristics, with 70%+ incremental margins, with 40--50% base margins,
and exceptional growth compared with traditional entertainment and cable
platforms.
We believe that investors will consistently place a premium on Viacom stock,
with the higher-growth nature of the company's assets, and greater cash flow
stability that the integration of these assets brings.
Near term, we believe that growth prospects look exceptional, and that the
growth is not factored into the stock price. We believe that 2000
advertising growth will exceed even the most bullish Street estimates.
Moreover, while we have been concerned about a slowdown on the TV side for
2001, it now appears that the upfront buying may actually support a
surprisingly attractive 2001.
Lastly, we note that there may be as much as $300 million in potential new
revenue opportunities and $300 million in expense reductions over the next
three years as a result of the merger. Revenue opportunities include the
management of CBS's six new duopolies, the "Karminization" of Paramount's TV
group and network, the exploitation of greater syndicated and cable
programming across the companies' combined assets, and cross promotion
between TV and cable networks. Opportunities for expense reduction include
the decrease of Viacom's combined $225 million overhead line (CBS operated
with $60 million in corporate overhead) and the deployment of a piece of
Viacom's $500 million advertising budget across CBS's assets.
Capacity for Free Cash Flow Generation
In our view, Viacom will have among the highest ratios of free cash flow to
revenue of the large media companies. As a result of this free cash flow
capability (in conjunction with the company's above-average growth rate), we
believe the company should trade at the high end of the 13--22x range of
EBITDA multiples at which most large-cap media companies trade.
We believe that the company's ability to generate roughly $3 billion in 2001
free cash flow (growing at 15--25% per annum), will substantially enhance
shareholder value. The ability of the company to buy back stock or make
accretive acquisitions could enhance the value of the shares beyond the
intrinsic value of its current operations.
The following is a list of what we believe are the primary drivers of growth
for the merged company:
- TV scatter pricing, up 20--30% at most networks, is among the strongest it
has been in years. This bodes well for continued upside at Viacom/CBS's TV
network, and, to a lesser extent, TV stations.
- In May and June, advertisers committed to 15% increases in the 2001
upfront. |
