Here is a tale designed to stress out even the most unflappable investor: once upon a time, there was a cable conglomerate with some major ratings problems. Its kids' network was in free-fall, the most popular program at its young-adult channel was way, way too large a percentage of the network's overall ratings, and the only way its earnings kept going up, quarter after quarter, was that it continued to run a really aggressive stock buy-back program. It had high-profile problems with one of its biggest distributors. Its CFO just left the company, and just the other day an analyst for Wells Fargo asked if MTV was "broken."
Here's what analysts have to say about Viacom: buy, buy, buy.
"The stock is incredibly depressed," said Brian Wieser, formerly the lead forecaster for Interpublic and now senior research analyst for Pivotal Research Group. "It's an incredible value. It's far and away my most screaming buy."
While a lot of the above problems have held Viacom back, the company's most serious problems are perceptual, and thus finite. "There's the perception of kids' viewing trends as being in a secular decline is pervasive," Wieser said, "but it's wrong. There's no empirical data to support it. It's possible that it's happening; it's just not provable." Part of what leads Wieser to suspect that Nickelodeon will bounce back hard is that none of its competitors have experienced similar declines—in fact, Disney's new kids' show Doc McStuffins is an unstoppable juggernaut of adorable children and stuffed animals, at least in ratings terms.
"If you were to add all the online video now being consumed by kids, it wouldn't even fall into one standard deviation," said Wieser. In fact, kids are still watching plenty of television, and more than one source said that Nick pegged the problem before it emerged into the ratings—just not soon enough to keep it from seriously damaging the network's ratings lead.
That problem, briefly, was that the channel was running SpongeBob SquarePants literally ten times a day at one point. It's the same problem MTV is having with the end of Jersey Shore (see above), write huge: eventually shows stop being popular, which is why you have to have more than one popular show. The network tried to fix the scheduling problem before ratings started to sink—in fact, of the reasons ratings fell off so precipitously was that as SpongeBob's popularity began to wane, Nick also stopped airing it as often—but the avalanche was starting as early as Fall 2010. "That's very different from saying that there's a secular problem," Wieser observed. "One's fixable and one isn't. The real concern among those investors that are bearish on Viacom is also the confusion between Nickelodeon and the stock."
Now there's light at the end of the tunnel. The network's revival of the venerable Teenage Mutant Ninja Turtles franchise has begun to show promise, and with kids primed, the opening of a new Turtles film in 2014 will likely help keep the series alive at worst and thriving at best for the next few years.
There are other problems of perception, admittedly. "There are a lot of investors that don't have a favorable opinion of management," Wieser opined, "which I think is a bit unfair." The analyst said that he believes the animosity goes back to the ouster of Tom Freston in 2006, and the perception that CEO Philippe Dauman and board chair Sumner Redstone speak with one voice. "Many investors dislike the pairing of controlling shareholding and managment. Whether it's warranted is beside the point."
It's worth pointing out that Wieser isn't alone in his assessment—Barron's included Viacom in its list of ten favorite stocks for 2013, calling the company "sharply undervalued" by investors, having gained about 15 percent per share this year while competitors increased about 30 percent. Even without ratings gains at Nick, author Andrew Bary said, there are other reasons to expect a bump up in share price at the parent company.
The stock buyback program (which Viacom has just effectively refinanced) will increase its price, and, of course, there are more morbid concerns: the 90-year-old Redstone won't be chairman forever. "Unexpected things can happen after the death of a controlling shareholder," Bary wrote.