Viacom Looking for Clues

Anders walks in dressed in Blue's Clues host Steve's green-striped shirt, sits down in the big red thinking chair, and pulls out his notebook and crayon.

Viacom (NYSE: VIA  ) reported earnings this morning, and we have collected some clues to figure out what the company should do next. Now that we're in our thinking chair, let's think.

Our first clue is a dependable revenue and earnings machine called the Cable Networks segment. This collection of TV-content producers includes MTV, Comedy Central, and our own home, Nickelodeon. They combined to grow revenues by 7% and operating income by 8% over what the equivalent parts of the old, pre-CBS (NYSE: CBS  ) split Viacom produced.

The growth isn't very exciting, but the $621 million of operating income (a non- GAAP measure that Viacom thinks is more relevant to its business than traditional net income) is very impressive for this segment. That's an operating margin of 39.5%.

Our next clue is the Entertainment division, consisting of a small music publisher and a large movie studio called Paramount Pictures. Paramount got a bit bigger in the last quarter when it bought DreamWorks Pictures -- just the live-action productions, not the animation studio. That's still trading separately as DreamWorks Animation (NYSE: DWA  ) .

This quarter, all of the growth in this segment came from the fresh blood that DreamWorks brought in. In fact, Entertainment would otherwise have shown slightly lower revenues than last year and an operating loss. After selling the DVD and rebroadcasting rights for existing DreamWorks films to a private consortium, the $900 million gained from that transaction brought the de facto price tag for this growth down from an original $1.6 billion to about $600 million. I say that's a reasonable price for access to Steven Spielberg and David Geffen, and it's an immediate shot in the arm to a slowing business segment.

That brings us to our third and last clue. Viacom had to borrow some money to finance the DreamWorks deal, which sounds reasonable enough. But it borrowed $4.75 billion, which is so much more than what DreamWorks cost them. At the same time, there is a stock repurchase program going on, with $982 million of the stock going back into the Viacom vault this quarter alone.

Maybe management thinks the company is grossly undervalued right now, in which case the reinvested money should grow faster than the average interest on the debt, which my quick and dirty calculation indicates is around 6.3%. Or perhaps Viacom just couldn't see any other ways to grow shareholder value right now. Either way, there is still a bit of cash left over from the new credit lines, which makes me want to figure out Blue's Clues right now.

So we have a slow-growing but dependable cable TV operation, with a film studio that can't seem to grow except by buying other companies, and some waffling on how to spend freshly borrowed money. If we put that together, what can Viacom do in the near future? How about if we put the extra funds into new acquisitions ... maybe something that would dovetail with the goals of both the cable and film divisions, like National Lampoon (AMEX: NLN  ) or DreamWorks Animation....

That's it! We just figured out Blue's Clues! Viacom must be gearing up to buy some more companies, because ... well, because that's the only way it sees any growth going forward. The company should be thinking about ways to grow in new directions and take advantage of emerging business trends, so maybe it would rather pick up something that gives new hope to traditional movie theaters, like IMAX (Nasdaq: IMAX  ) , or a video-on-demand expert, like SeaChange (Nasdaq: SEAC  ) . Either way, I think Viacom is gonna buy something. You can put that in your handy-dandy notebook.

Related links:

IMAX is aMotley Fool Rule Breakersrecommendation, and DreamWorks Animation is aMotley Fool Stock Advisorpick. Try out any of our investing newsletter services free for 30 days.

Anders Bylundthanks you for helping him figure out Blue's Clues -- he could never have done it without you. He obviously watches way too much children's television, and he owns shares in IMAX. You know all aboutdisclosure, because you're really smart.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 513540, ~/Articles/ArticleHandler.aspx, 10/21/2016 2:27:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,134.72 -27.63 -0.15%
S&P 500 2,139.80 -1.54 -0.07%
NASD 5,251.22 9.38 0.18%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 2:12 PM
CBS $57.95 Up +1.46 +2.58%
CBS CAPS Rating: ***
DWA $40.97 Down +0.00 +0.00%
DreamWorks Animati… CAPS Rating: ***
IMAX $31.24 Down -0.50 -1.56%
IMAX CAPS Rating: *****
NLN $0.73 Down +0.00 +0.00%
National Lampoon CAPS Rating: No stars
SEAC $2.69 Up +0.01 +0.37%
SeaChange Internat… CAPS Rating: ****
VIA $42.15 Up +1.20 +2.93%
Viacom CAPS Rating: ***