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Split-Up’s a Rocky Road for Viacom Sibs

7/21/2006 8:00 PM Eastern

Times have been tough for content players Viacom Inc. and CBS Corp. since their much-ballyhooed split in January, and according to some analysts, the second quarter won’t be much better.

Viacom and CBS split into two separate publicly traded entities on Jan. 1, with Viacom comprising growth assets like MTV Networks, Black Entertainment Television and Paramount Pictures; and CBS taking the more stable assets, like the CBS Television Network and stations, CBS Radio, CBS Outdoor and Showtime Networks Inc.

An 'Uninspiring,’ Messy Quarter
Below are second quarter financial estimates for Viacom and CBS from UBS Securities cable analyst Aryeh Bourkoff and Merrill Lynch & Co. media analyst Jessica Reif Cohen, respectively. CBS is scheduled to report its second quarter results on Aug. 3, while Viacom will report second quarter earnings on Aug. 9. (In millions, except for percentages)
Revenue % change OIBDA % Change
Viacom $2,506 8.9% $634 10.5%
CBS $3,460 (1%) $857 (6%)
Source: Analyst reports

Since the split, Viacom stock has underperformed, compared with its corporate cousin. Viacom’s shares are down 19.5% since Jan. 3, compared to a 1.1% appreciation for CBS shares over the same time frame.

But both companies have lagged in some key metrics: in the first quarter, Viacom’s cash flow growth was 3%. During the same span, CBS, dragged down by its sluggish radio division, reported 4% revenue growth and 3% cash-flow growth.

SLUGGISH AD ENVIRONMENT

At Viacom, UBS Securities cable debt and equity analyst Aryeh Bourkoff said second-quarter results will be “uninspiring,” and he lowered his 12-month price target on the stock from $44 per share to $40 each. Bourkoff maintained his “neutral” rating on the stock.

Bourkoff anticipates 8.9% revenue growth (to $2.51 billion) and 10.5% cash-flow growth (to $716 million) for the period. Earnings per share from continuing operations should check in at 42 cents per share, he wrote.

Prudential Equity analyst Kathy Styponias is a little more optimistic — she anticipates 9% revenue growth and 12% cash-flow growth at Viacom. Still, she reduced her 12-month price target on the stock (to $40 from $42) and lowered her revenue estimate by 1% and her cash-flow estimate by 5%, mainly because of the sluggish advertising market.

For CBS, the second quarter is expected to be worse than the first, according to Merrill Lynch & Co. media analyst Jessica Reif Cohen, as the period will be affected by the sluggish advertising market and the shuttering of its UPN broadcast network.

CBS announced earlier this year that it would combine UPN with Time Warner’s The WB to form The CW, set to launch this fall.

In a research report, Reif Cohen wrote that the second quarter will be a “messy” one for CBS, with the parks and UPN divestiture, coupled with continued sluggish performance at its radio division.

Reif Cohen also expects revenue to decline about 1% in the period and said cash flow should dip 3% in the quarter, versus her previous estimate of a 2% decline.

“We anticipate another relatively difficult quarter for CBS,” Reif Cohen wrote.

At the television group, Reif Cohen expects cash flow of $525 million, a 4% decrease compared to the 2% increase the company enjoyed in the first quarter, mainly because of a weak scatter market and tough comparisons versus last year. She also lowered her CBS network revenue estimate to flat for the period (versus a 3% increase previously) and dropped her estimated TV station revenue growth to 2% from 9% previously.

At the radio stations, cash flow is expected to decline 17% to $232 million, mainly because of difficult comparisons due to the loss of popular shock jock Howard Stern, who jumped to Sirius Satellite Radio in January. She maintained her estimate that radio revenue should decline about 8% in the period.

SECOND-HALF IMPROVEMENT

However, Reif Cohen said that second-half results should show improvements as unprofitable sports-rights contracts begin to roll off.

Reif Cohen also saw some light at the end of the tunnel with the proceeds from the sale of CBS’s Paramount Parks unit – the deal to sell the parks to Cedar Fair for $1.4 billion closed last month. With that money in hand, coupled with an estimated $300 million to $400 million from the planned sale of certain radio assets, Reif Cohen wrote that CBS could give some of that money back to shareholders in the form of either a larger dividend, or through a tender offer.

Reif Cohen maintained her “buy” rating on the stock, adding that despite the sluggish performance, the stock is still underpriced.

 

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