Viacom, Inc. (VIAB), CBS Corporation (CBS): Why This Entertainment Content Business Looks Like a Buy

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Since the beginning of the year, Viacom, Inc. (NASDAQ:VIAB) has delivered a sweet gain for its shareholders, up by more than 50% and handily beating the S&P 500’s return of nearly 20%. Recently, it experienced a significant gain of nearly 6.5% in a single day due to its impressive third-quarter results and its plan to return cash to shareholders.

Impressive second-quarter earnings growth

In the third quarter, its revenue increased around 14% to nearly $3.7 billion, thanks to growth in the Media Networks and the Filmed Entertainment segment. Its operating income growth came in at as much as 20%, to nearly $1.09 billion, due to a higher Media Networks affiliate fees and advertising revenue, which more than offset the higher cost in Filmed Entertainment distribution. Its diluted EPS from continuing operations was $1.32, 33% higher than the same period last year.

Philippe Dauman, Viacom, Inc. (NASDAQ:VIAB)’s President and CEO, mentioned that the solid affiliate revenue gains were due to the expansion of the partnership with traditional cable operators and new digital distributions. He commented further: “In a crowded summer season, Paramount’s tentpoles – Star Trek Into Darkness and World War Z – achieved critical and box office success, and the studio has a promising slate remaining through calendar 2013 and beyond.”

A huge share buyback

The market values Viacom, Inc. (NASDAQ:VIAB) at around 11.25 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization). At the current trading price, Viacom offers its shareholders a dividend yield of 1.6%, with a payout ratio of 33%. Income investors might also like its huge share buyback program. Recently, the company announced an increase in its Class B stock repurchase program, from $10 billion to $20 billion. Thus, investors would be entitled to as much as 52% buyback yield in total.

In 2005, Viacom, Inc. (NASDAQ:VIAB) split itself into two different businesses: Viacom and CBS Corporation (NYSE:CBS). CBS is the owner of the struggling radio business and slow growing broadcast network, and Viacom owned the MTV’s fast growing cable networks and Paramount Studios. Famous investment manager Mario Gabelli likes Viacom a lot. He mentioned that while CBS was doing quite well under Les Moonves’ leadership, Viacom is better under the leadership of Tom Dooley and Philippe Dauman. Mario Gabelli believes that the company might reach $100 per share within just three years.

CBS and Time Warner have a cheaper valuation

CBS Corporation (NYSE:CBS) has a bit cheaper valuation than Viacom, Inc. (NASDAQ:VIAB). The market values CBS at 10.8 times its trailing EBITDA. In the second quarter, CBS also managed to deliver decent growth. Its revenue increased from $3.33 billion in the second quarter of 2012 to nearly $3.7 billion in the second quarter this year, while net earnings jumped more than 10.5%. EPS came in at $0.76. CBS offers a lower dividend yield than Viacom, at 0.90%, with a lower payout ratio of 18%. The company also returns cash to shareholders via share repurchases. Recently, it increased its share repurchase authorization by $5.1 billion to around $6 billion, yielding as much as 18% in buyback activities.

Another peer, Time Warner Cable Inc (NYSE:TWC), also has a lower valuation than Viacom, Inc. (NASDAQ:VIAB). The market values Time Warner at 10.2 times its trailing EBITDA. Time Warner derives most of its revenue from video, high-speed data and video services to both business and residential customers.

According to Fitch, the company intends to have a better balance between profitability and subscriber quality, including subscriber growth and volume metrics. The company will focus on attracting higher quality subscribers to generate better residential business retention rates. With the new pricing architecture in 2013, the company expects to have a more stable customer base while relying less on promotional pricing.

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