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Viacom: A Great Long-Term Buy

By Ishfaque Faruk – Mar 17, 2014 at 1:41PM

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Viacom's networks are driving the company's earnings growth. In addition, the company is betting big on itself. Viacom is buying back more than 23% of its outstanding shares, which will drive incremental upside for long-term shareholders.

Global media giant Viacom (VIAB) has been doing well, with its stock price near recent highs. The company's broad array of TV shows and motion pictures continues to resonate with audiences around the world, and its earnings are growing as well. In addition, Viacom's management has been returning a lot of capital to shareholders, which will grow the company's earnings per share consistently in the future.

Solid business lines
Viacom's operating income increased 20% to $960 million in the last quarter. The company's operating margin expanded to 30%, a notable improvement from its year-ago margin of 24%. Diluted earnings per share grew 31% year over year to $1.20, a rise connected to earnings growth in its business and the company's outsized share buybacks.Viacom 10Q

The company is very good at producing great entertainment content and continues to engage consumers across the globe. In the holiday quarter of 2013, Viacom's media business saw a 6% increase in revenue to $2.54 billion, driven by higher fees from advertising and affiliates.

Viacom subsidiary Paramount Pictures debuted high-profile films such as The Wolf of Wall Street in the last quarter, and their impact should show up in the company's books in the current quarter. Overall in the last quarter, the company's filmed entertainment business saw revenue decrease 30% to $681 million; the segment had an operating loss of $74 million. But this was due to the smaller number of movie releases in the three-month period. Upcoming films with strong revenue potential include Transformers: Age of Extinction and SpongeBob SquarePants 2

Viacom's media business includes highly valuable networks including Nickelodeon, VH1, Comedy Central, and MTV. The company's TV content is distributed to 160 countries and reaches in excess of 700 million households. Having such broad scale and reach gives the company's business a sizable moat, and provides the funds needed to invest more in developing content. Nickelodeon is a household favorite among kids in the U.S. and across the globe. In the last quarter, Nickelodeon regained its spot as the leading cable network among kids ages 2-11.

Viacom's media business delivers all of its operating income, in the last quarter 80% of total revenue coming from its TV networks business. And continued growth in MTV, Nickelodeon and VH1 etc. around the globe will be crucial for the company's earnings profile.

Future growth
The company is keeping up with the TV Everywhere phenomenon, and launched apps for Nickelodeon and MTV and will be releasing apps for Nick Jr. and Comedy Central later this year. In addition, Viacom is taking steps to wholly own some of its channels  MTV and Paramount Channels in growing markets including Russia and Brazil, as the company tries to buyout certain regional partners.  

Viacom will be able to monetize its content via video streaming providers such as Netflix (NFLX -0.31%) and (AMZN -0.83%). Netflix has amassed more than 42 million subscribers and is planning a big expansion in Europe in 2014, while Amazon Prime has stated that they have tens of millions of Prime subscribers. These new distribution outlets provide incremental revenue-generation opportunities for Viacom and other content providers. The company also provides content through its joint venture of EPIX, in which it holds a 50% interest, to Internet TV platforms such as Netflix and Amazon. 

Strong commitment to value creation
Viacom's gigantic share repurchase program has been instrumental in driving the company's earnings per share, and led the company's stock price to its recent highs. Viacom bought back $4.7 billion worth of stock in fiscal 2013. And it expects to buy another $3.25 billion in fiscal 2014. 

At the end of January, Viacom still had $8.9 billion left from its massive $20 billion buyback authorization. The company's share repurchase program will aid the growth of the company's EPS growth considerably by reducing the outstanding share count and in the process drive higher returns to shareholders.

The takeaway
Viacom distributes its entertainment content all over the world, and it is focused on creating more value for its content by getting more distribution. The company's earnings are growing, and it is buying back a large number of shares every quarter. As the company's EPS continues to grow, Viacom's stock price will do very well in the long run.

Ishfaque Faruk owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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