Commentary: Viacom's profit rises, but stock falls

Tag : Stock Boot

After all, The Hollywood Reporter Showbiz 50 stock index is up 5%,from 1,147.33 on Jan. 3, 2006 (the first day after the Viacom splitwith CBS Corp.) to 1,204.77 on Tuesday. Viacom shares have dropped20.8%, from $41.54 to $32.90, over that period even though itsfinancials have grown faster than most of its peers.

For example, financial growth at Viacom has handily exceeded CBSCorp., but the dividend-paying sibling has done better stock-wisesince the companies' split (down 14.2%).

In short, Viacom so far is fulfilling its pre-split promise ofbeing a growth company in terms of financials, but not in terms ofstock price.

What has held Viacom shares back is the double-whammy of anever-changing set of challenges and a management communicationstyle that doesn't quite connect with investors.

In terms of business challenges, Dauman took over at a time whenkey cable networks in the Viacom family were seeing ratingsdeclines. As soon as investors became comfortable that this problemwas fixed thanks to new hits like MTV's "A Shot at Love With TilaTequila," the future relationship with Steven Spielberg and hisDreamWorks partners hit the headlines.



"It's always something with Viacom," Miller Tabak analyst DavidJoyce says. "First, they started losing TV viewership by the youngaudiences. ... Then it started comping better, and the marketstarted focusing on the internal fighting between Paramount andDreamWorks. Now, it's some sort of economy-related difficulty, asthey are having some sort of problem selling advertising acrossplatforms."

Indeed, Dauman recently caught investors flat-footed by telling aninvestor conference -- pretty much in passing -- thatsecond-quarter U.S. advertising revenue growth at Viacom's cablenetworks would be half of what management had predicted a monthearlier.

This is where the second problem comes in: communication. Daumanhas been one of the most active entertainment executives on thespeaking circuit, explaining how his team has made Viacom moreefficient and creative. Yet investors so far seem not to feelenough excitement from him.

Plus, Viacom has repeatedly managed to disappoint and surprise theStreet. The fact that Joyce couldn't fully get his hands around andexplain the latest ad challenge tells part of the story.

No wonder then that analysts have given Viacom brass an earfulafter the recent reduction in guidance.

"We are disappointed with the limited information provided on thisoutlook change," says UBS analyst Michael Morris, who alsocriticized "the almost nonchalant delivery" of the bad news.

Pali Research analyst Richard Greenfield complained that managementdidn't "put any context around the type of cost controls it has atits disposal to mitigate the impact of revenue shortfalls, nor thecontinued progress it continues to make outside the U.S."

Recommends Greenfield, "Improved communication skills wouldaccelerate (the company's) stock performance."

For now though, analysts remain bullish on Viacom's potential, ifwearily so.

Joyce has a "buy" rating with a $45 short-term and $51 long-termprice target on the stock. Morris recently confirmed his "buy"rating and $48 target, saying "we caution against throwing the babyout with the bathwater."

But investors' patience could wear thin sooner or later. AtViacom's annual shareholder meeting last month, Dauman promisedthat "the market will appropriately value our shares" over time ifmanagement continues to execute well, while Redstone suggested thatViacom shares would be higher next year.

They better be.

Redstone has continued to shower Dauman with praise for thepositive operational and planning changes he has brought to thecompany. But beyond investors, part of Dauman's wealth and --importantly -- that of his boss are tied to the sluggish stock.

So, for everyone's sake, that stock better move higher.