Over the past year, Viacom's (NASDAQ:VIA) (NASDAQ:VIAB) future was clouded by the ousting of its longtime CEO, rumors of it selling Paramount Pictures, and nixed discussions of merging again with CBS (NYSE: CBS). But CEO Bob Bakish, who took the top job last October, wants investors to focus on the media giant's future again.
At the recent National Association of Television Program Executives conference in Miami Beach, Bakish outlined his plans for Viacom's future. A top priority is to fix MTV, which has been shedding viewers for a half-decade. Shortly after Bakish became CEO, Viacom Music and Entertainment head Doug Herzog named VH1 chief Chris McCarthy as the new president of MTV. His predecessor, Sean Atkins, led MTV for just over a year before resigning.
Bakish also said that there are no longer any plans to sell Paramount Pictures -- a plan championed by former CEO Philippe Dauman but opposed by former Executive Chairman Sumner Redstone. That conflict led to the widely publicized clash between Dauman and Redstone, which resulted in Dauman's departure and Redstone's resignation.
Bakish admitted that "there's been a lot of drama," but that Viacom now sees a "clear path forward" and will reveal its full turnaround strategy in February. With Bakish at the helm, will Viacom become a compelling value play? Or are its low valuations merely a trap that could ensnare overeager investors?
Why Viacom might be a value play
Viacom's more widely traded B shares trade at just 8 times earnings, which is much lower than the industry average of 19 for diversified entertainment companies. By comparison, Disney (NYSE:DIS) and Time Warner (NYSE:TWX.DL) respectively trade at 19 and 17 times earnings. Viacom also trades at just 1.3 times sales, which is much lower than Disney's P/S ratio of 3.1 and Time Warner's P/S ratio of 2.6.
Looking ahead, analysts are cautiously optimistic about Bakish's ability to turn things around. They expect Viacom's revenue to rise 3% this year, compared to a 6% decline last year. Earnings are expected to rise 6% this year, compared to its 34% plunge last year. Viacom also pays a decent forward yield of 2%, which is comfortably supported by its payout ratio of 39%.
Bakish believes that Viacom must become "a technology company" to offset its losses to cord-cutters and streaming platforms. This means that it will likely invest more in over-the-top platforms and launch stand-alone apps for its cable channels -- similar to Disney's plans to launch a stand-alone streaming version of ESPN, and Time Warner's launch of HBO Now in 2015.
These moves, combined with Viacom's newer ad products (the Velocity in-program ad placement platform, Echo social media campaign platform, and Vantage viewer data-mining platform) might boost the media giant's ad revenues again. As for Paramount, a stronger focus on durable, multi-year franchises and recent investments from China could stabilize the studio's year-over-year revenue growth.
Why Viacom might be a value trap
However, Viacom is still trading at such a discount to its peers for several reasons. First, its annual revenue has fallen for five consecutive years due to its dismal cable TV ratings, sluggish ad revenue growth, and Paramount's uneven theatrical results.
Viacom lacks big TV series that generate explosive social media buzz. MTV's scripted programs frequently miss the mark with younger viewers, and Comedy Central's flagship Daily Show has been hemorrhaging viewers ever since Trevor Noah replaced Jon Stewart. Meanwhile, Parrot Analytics reports that Time Warner/HBO's Game of Thrones was the most popular show of 2016, followed by AMC's (NASDAQ: AMCX) The Walking Dead, Disney/ABC's Pretty Little Liars, and HBO's Westworld. Unless Viacom invests heavily in new shows that can challenge those heavy hitters, it's unlikely to win back viewers or advertisers.
Paramount also lacks standout film franchises to compete against Disney's Marvel, Star Wars, and Pixar properties, or Time Warner's DC films and other Warner Bros. franchises. Viacom's biggest franchise is Transformers, but that series is arguably running out of steam after five films. Its new Star Trek and Teenage Mutant Ninja Turtles films both came in below expectations last year. Therefore, Paramount must seriously rethink its box office strategies if it wants to go head-to-head against Disney, Time Warner, and other top studios.
The verdict: Avoid Viacom for now
It's good to see Viacom's drama finally end, but Bakish's plans sound a bit generic. MTV might be under new management, but it's unclear how the network can compete with higher-budget scripted programs and other music video streaming platforms like YouTube.
It's also doubtful that stand-alone OTT solutions will magically help Viacom's other struggling networks when they aren't that popular on cable TV. I believe Viacom is an attractively valued stock with a decent dividend, but I'd rather wait for Bakish to reveal his full turnaround plans in February before deciding to buy shares.