Mario Gabelli, the founder and CEO of GAMCO Investors, is one of the most successful investors in the world. In the past 25 years, he delivered an annualized gain of 11.7%, beating the S&P 500’s return of 9.7% in the same period. In the interview with Barron’s, he thought that it was quite “an exciting time” for investors, due to the rising trend of spinoffs and buyouts.
He remains bullish on Viacom, Inc. (NASDAQ:VIAB), the business that he recommended in the Barron’s Roundtable at the beginning of the year. Since the split occurred between CBS Corporation (NYSE:CBS) and Viacom in 2009, Viacom has been an aggressive cannibal of itself. Investing in a cannibal, Charlie Munger suggested, is one of the three ways to have successful investments. Let’s take a closer look to see whether or not Viacom is a good buy for investors now.
The Media Networks segment has a much higher operating margin
Viacom, Inc. (NASDAQ:VIAB) is a leader in entertainment content, operating in two main business segments: Media Networks and Filmed Entertainment. In Media Networks, the company has four main channel groups: Music & Logo, Nickelodeon, Entertainment and the BET Network, reaching 700 million households in more than 160 countries. Filmed Entertainment is comprised of Paramount Pictures, MTV Films, Insurge Pictures and Nickelodeon Movies brands.
While the Media Networks segment derived most of its revenue from advertising sales, the Filmed Entertainment segment generates revenue from the theatrical release and distribution of motion pictures. The Media Networks segment produced most of its revenue, $9.2 billion. This segment also enjoyed a much higher operating margin, at nearly 42.3%, while the operating margin of the Filmed Entertainment segment was only 6.74%.
An aggressive cannibal with the value of around $130 per share
Viacom, Inc. (NASDAQ:VIAB) has been buying back its shares aggressively. In 2009, it had around 755 million outstanding shares. It has spent $2.5 billion to repurchase 55.7 million shares in 2011 and $2.8 billion to buy back 59.9 million shares in 2012. In the first two quarters 2013, it repurchased additional 25 million shares for around $1.4 billion. In the second quarter of fiscal 2013, the share count stayed at 487 million. Gabelli thought that the share count would continue to drop to 310 million in the next three or four years. He said that it was buying the A shares along with Chairman Sumner Redstone.
Viacom, Inc. (NASDAQ:VIAB) is trading at around $66.80 per share, with the total market cap of $32.40 billion. The market values Viacom at 10.3 times its trailing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Gabelli commented that its private-market value should be in the range of $130 – $140 per share.
CBS and its REIT conversion of the outdoor business
The split of Viacom, Inc. (NASDAQ:VIAB) and CBS separated a fast-growing cable network and Paramount film studios from the slower-growing broadcast network and the declining radio businesses. While Viacom, Inc. (NASDAQ:VIAB) owns a fast-growing business, CBS owns the broadcasting network and radio business. Interestingly, both CBS Corporation (NYSE:CBS) and Viacom are under the leadership of billionaire Redstone. For the past five years, CBS Corporation (NYSE:CBS) has outperformed Viacom.