Why Viacom Should Be Bought on the Dip

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Not wanting to feel left behind in the race to stream television programs, Viacom (NASDAQ: VIAB) inked an agreement with Amazon for Prime Instant Video releases, thus maintaining its presence online subsequent to the expiration of its deal with Amazon's rival Netflix. Fellow media conglomerates have been securing their investments in Internet video streaming, including Time Warner's (NYSE: TWX) roll out of Video-on-Demand services, as I detailed in a recent blog, as well as News Corp., DirecTV and Walt Disney's (NYSE: DIS) bids to buy out the remainder of website Hulu.

Time Warner's latest quarterly can provide an idea of the profit potential of video-on-demand, as its home video/electronic delivery revenues advanced 8%, despite slowdowns in other television businesses. The bulk of the increase could be attributed to VOD and electronic sell-through, whereby customers own the electronic content.  

As for Disney, in addition to its equity stake in Hulu, its current VOD presence includes the offering of ABC and cable television broadcasts, and the licensing of home entertainment content shortly after its release on DVD. The bid for Hulu, reportedly for more than $1 billion is an aggressive move to gain a greater stake in its own VOD operations, and that of its broadcasting peers.  

Viacom's management is pleased with the growth it has seen in digital distribution of its content through outside deals. The youth-focused entertainment giant is taking further measures to capture young audiences. For instance, this March, it launched a Nickelodeon app for the Ipad and similar offerings are in the works for release later this year. It touts the products as adding to the viewing experience through interactive features such as games and discussion boards.

Viacom is securing its foothold in businesses with long-term profitability potential. It also has some catalysts that should bolster results much sooner than that, making the shares a worthwhile holding.

Solid prospects after a weak start

Viacom's first-quarter earnings were beset by a soft performance from its film unit, Paramount, as well as spending to enhance its television content. Programming investments could well support results over time, as discussed in my earlier blog. Moreover, spring and summer movie releases have already proven to be more lucrative than last year's titles, a factor that should drive profit growth in the June, September, and December quarters.

G.I. Joe: Retaliation hit theaters at the end of March and Star Trek Into Darkness was rolled out in mid-May. Each was a boon at the box office and ought to fuel strong DVD sales in the holiday season. The former's $122 million and latter's $185 million in receipts reflect the strength of Viacom's franchises and its capability to revive former blockbuster concepts.

Incidentally, digital market expansion will probably have an immediate impact on profit growth, helping to boost affiliate revenue gains from 2%, to around 10% for the full fiscal year (ends in September).

Putting it all together, the likelihood of a share-earnings surge is good, and shareholders ought to have reason to be assured. Its well-known networks, MTV, Nick, BET, Comedy Central, VH1, Spike, and others, that contribute the majority of income, should continue to attract viewers, thanks in part to aforementioned investments.

Plus, Viacom may have even more on the way to bolster the Filmed Entertainment division's bottom line, particularly World War Z, starring Brad Pitt and due on the silver screen on June 21st. Looking to next year, the start up of an animation unit will be highlighted by a SpongeBob movie slated for late 2014 release. Although it faces competition from Disney and others, animated films are almost a surefire boost to earnings and should be another growth engine. As for Disney itself, it plans to release the animated Planes in August, subsequent to an updating ofThe Lone Rangerscheduled for early July.

The stock's appeal

Having illustrated all of Viacom's positive features, one can see why the shares skyrocketed versus the S&P this year. What is generating interest in the stock at this juncture? It recently sold off to a moderate extent, providing some value. Viacom is consistently repurchasing shares. Plus, its financial strength and profitability ratios, often good gauges of a company's quality, are above those of its industry as a whole. I suggest purchasing the shares.

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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