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Viacom Inc. (VIAB): This Media Giant Might Double in Four Years

Charlie Munger has advised Monish Pabrai to focus on cannibals in order to invest successfully. Cannibals are companies that are “eating themselves away,” i.e repurchasing a huge amount of their shares over time. In a recent 2013 Barron’s Roundtable, Mario Gabelli, a famous investment manager, has recommended a business that he had been invested in for 25 years. This business had been buying back stocks and it would continue to do so in the future. It was Viacom Inc. (NASDAQ:VIAB).

Viacom, Inc. (NASDAQ:VIAB)Business Snapshot

Viacom is considered a leading global entertainment content company with two main business segments: Media Networks and Filmed Entertainment. The Media Networks segment operates through four channels including Music & Logo, Nickelodeon, Entertainment and BET Networks. The Film Entertainment produces motion pictures under several brands such as Paramount Pictures, Insurge Pictures, MTV Films and Nickelodeon. Media Networks accounted for around 66% of the total revenue in fiscal 2012. The majority of revenue, $4.77 billion, or 51.8% of Media Networks’ revenue, was generated from advertising. Affiliate fees ranked the second biggest revenue contributor in the Media Networks segment, with nearly $3.9 billion in revenue. Filmed Entertainment generated most of its revenue from three sources: theatrical ($1.3 billion), home entertainment ($1.66 billion) and television license fees ($1.39 billion).

Keep Repurchasing Shares

In 2005, Viacom split into two companies: Viacom and CBS Corporation. This move separated the struggling radio business and slow growing broadcast network from MTV’s fast growing cable networks and Paramount film studios. CBS owned the radio and broadcast network while Viacom owned MTV networks and Paramount studios. Mario Gabelli commented that CBS was doing well with the leadership of Les Moonves, and Viacom was doing much better under Philippe Dauman and Tom Dooley. However, both companies have the same executive chairman, billionaire Sumner Redstone. Viacom is a typical “cannibal.” As Gabelli described, Viacom has kept repurchasing shares. Since 2005, the number of shares has been reduced from 755 million to 507 million. In the next 3-4 years, the share count is expected to decline to only 355 million.  In fiscal 2012, Viacom’s EPS was $4.36, and it might increase to $9 in the next 4 years. As of September 2012, Viacom had nearly $7.45 billion in total stockholders’ equity, $848 million in cash and $8.1 billion in long-term debt.

Might Double in Four Years

Since 2005, Viacom has generated sustainable cash flow. The free cash flow has been fluctuating in the range of $1 billion – $2.5 billion. Over the trailing twelve months, Viacom generated more than $2.34 billion in free cash flow. The company has used free cash flow generated to buy back shares. Since 2007, the treasury stock has grown from $4.5 billion to more than $11 billion. The EBITDA in the last 12 months was $4.14 billion. At the current trading price of $62.80 per share, the total market capitalization is nearly $29.7 billion. The market is valuing Viacom at 9.2x EV/EBITDA and 14.4x trailing P/E. Mario Gabelli noted that he recommended the stock when it was trading at $30 per share several years ago. He had expected it to double in 4 years but it gained 100% in just 3 years. Looking forward, he thought the stock might reach $100 per share in three years. If Viacom could earn $9 per share in 2006, I think the stock would reach $130 per share by then.

Peers Comparison

Compared to the peers including Time Warner (NYSE:TWX), The Walt Disney (NYSE:DIS) Company and CBS, Viacom has the highest operating margin. Over the past 12 months, Viacom’s operating margin stayed at 28% while the operating margin of Time Warner and Walt Disney were both 21%. CBS had the lowest operating margin of 20%. In terms of leverage, Viacom is the most leveraged company, with a 1.1x Debt-Equity ratio. CBS and Time Warner both ranked second with 0.6x D/E. Walt Disney employed the least leverage among the four, with only 0.3x D/E.  In terms of valuation, all four companies have similar valuations, in a range of 9.2x – 9.7x EV/EBITDA.

Foolish Bottom Line

“Cannibals” could keep increasing their EPS just by buying back shares in the market. Indeed, repurchasing undervalued shares in the market seems to be the most efficient way to enhance long-term shareholders’ value. With the consistent free cash flow and share buybacks, Viacom could be a nice “cannibal” for investors.

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