Viacom (VIAB): Mounting Operating Costs Pose Headwinds

On May 20, 2016, we issued an updated research report on of Viacom Inc. (NASDAQ:VIAB) . The company reported disappointing results in the second quarter of fiscal 2016 with lower-than-expected earnings and revenues. Lack of hit movie releases, along with a strong U.S. dollar, was the primary reason behind the poor top-line performance.

The cable TV industry in the U.S. is highly matured as well as saturated. Viacom’s flagship cable channels are already distributed, which means that chances to boost revenues by expanding distribution channels are limited. During the last reported quarter, revenues were down 3% year over year to $2,381 million. Quarterly operating profits came in at $805 million, down 11%. Affiliated fees and ancillary revenues fell 1% and 4%, respectively, on an annualized basis. Also, domestic and worldwide advertising revenues deteriorated a respective 5% and 1%. This reflects the company’s need to improve cable channel ratings to boost its top line.

Viacom also needs to diversify its geographic presence in order to compensate for the saturated domestic market. In the second quarter of fiscal 2016, the company witnessed a 21% plunge in home entertainment revenues owing to the lack of movie releases. Moreover, volatile scatter advertising rates, along with a growing presence in emerging markets like India, will further expose the company to foreign exchange headwinds.

Meanwhile, online video streaming companies have become a growing threat for cable TV operators who may not be able to pay higher affiliate fees to Viacom as its contents can be viewed online. Further, the launch of new channels in international markets has raised distribution expenses of the company. Thus, mounting operating costs could continue to impact Viacom’s margins, going ahead.

Viacom currently has a Zacks Rank #4 (Sell).

Some better ranked stocks in the same industry are Time Warner Inc. (NYSE:TWX) , The Walt Disney Company (NYSE:DIS) and Pearson (LON:PSON) plc (NYSE:PSO) . All of them carries Zacks Rank#3.