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Stock Analyst Update

Robust Advertising Growth Makes Viacom Attractive

Double-digit rise in ad sales powers third-quarter results.

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What Happened?
Viacom (VIA) on Wednesday reported better-than-expected earnings driven by continued strong growth in advertising. Net income came in at $0.02 compared with an expected $0.02 loss; it was down from $0.14 in the prior-year period because of higher taxes and costs related to the purchase of CBS. Thanks to popular TV shows, advertising sales grew by double digits and Mission: Impossible 2 had an impressive worldwide performance, grossing $529 million thus far. Viacom's healthy increase in EBITDA (earnings before interest, taxes, depreciation, and amortization), a proxy for cash flow, also boosted results--adjusting for the CBS acquisition, EBITDA grew by 22% to $1.4 billion.

What It Means for Investors
We continue to believe that Viacom has excellent upside potential because of the diversity and scope of its advertising outlets, its excellent management team, its powerful brands such as MTV, and the most popular show on TV--Survivor. Contrary to recent speculation about a slowdown in advertising spending, president and chief operating officer Mel Karmazin stated during the conference call that the advertising market was "healthier than ever before." The slowdown in dot-com advertising is not affecting Viacom because of its large customer base of blue-chip companies and its numerous advertising outlets, which include TV, cable TV, radio, outdoor advertising, and the Internet.

Richard Wilson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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