Bear Stearns media analyst Spencer Wang maintained his “outperform rating on Viacom last week but raised his 12-month price target on the stock to $49 from $45, adding that the media giant is his top pick for 2007.
Fueling Wang's optimism are three catalysts he believes will boost the stock in the coming year and close the valuation gap with its peers: an improving scatter market should offset limited cost per thousand viewers (CPM) growth in the most recent cable upfront and yield mid to high single-digit ad revenue growth; strong distribution fees from Shrek 3 and Bee Movie should drive 25%-plus cash-flow growth at its Paramount Studios film unit; and a recovery in the international market, particularly in Germany, should begin to take hold during the fourth quarter of 2006 and the first quarter of 2007.
Viacom's cable networks are expected to continue their strong performance, with 6.5% revenue growth in the fourth quarter, according to Wang's estimates.
Wang believes that the improved performance should also help close the price-to-earnings multiple gap between Viacom stock and its peers.
While Viacom shares are trading in line with similar media companies on a cash flow multiple basis (about 10.7 times), its P/E multiple is about 18.1 times, a 13% discount to its peer average of 20.8 times.
If his thesis is correct, Wang predicts Viacom's P/E multiple could rise to 21 times.