Last Updated: May 2, 2008: 11:22 AM EDT
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Viacom works the media mix magic

Most analyts think the entertainment giant's cable networks will help it weather a recession.

By John Simons, writer

(Fortune) -- Does Viacom's mix of media businesses make the company recession-resistant?

Some Wall Street analysts believe so. Even as film production costs inch higher at the conglomerate's Dreamworks and Paramount movie studios, robust ratings at cable networks MTV, Nickelodeon and VH1 are expected to draw increased ad revenues.

The company's first quarter earnings report - released Friday - offers the best indication of just how insulated Viacom (VIA) is from the looming economic downturn. The company beat analyst estimates with quarterly earnings of 42 cents per share and revenue of $3.12 billion. At the same time, net income increased 33% to $270 million. Viacom shares have dipped 4.4% over the last year, compared with the S&P 500's 6.2% drop over the same period. Shares were flat in mid-morning trading Friday.

In the first three months of 2008, the media conglomerate was firing on all cylinders, posting gains in almost all of its most important metrics. In Viacom's movie unit, revenues rose 12% while operating profit jumped nearly 42%. The company's cable networks division saw an 16% increase in revenue and as operating income rose 15%. Thanks in part to the writer's strike, which sent viewers channel surfing for fresh fare, Viacom's cable networks have garnered healthy ratings over the past two quarters.

In the first quarter, according to Nielsen Research, collective viewership on Viacom's networks rose 5% compared to the same period last year. As a result of original programming on MTV and VH1, those trends should continue through the first half of 2008, say analysts. Cable channels such as Comedy Central, MTV, Nickelodeon, TV Land, and VH1 are Viacom's bread and butter as they generate the majority of the company's profit.

Viacom's advertising revenue grew 8% during the first quarter and are on track to deliver similar growth in the second quarter, CEO Philippe Dauman told analysts during a conference call Friday morning.

Morgan Stanley research analyst Benjamin Swinburne maintains an "overweight" rating on Viacom shares and projects a year-end target price of $47. A large part of Swinburne's growth thesis is predicated on advertisers continuing to shift the investments away from broadcast television and into cable channels during 2008. Alan Gould, an analyst with Natixis Bleichroeder, believes Viacom can maintain its momentum - even in an advertising downturn. He notes that Viacom drew about 37% of its 2007 $13.4 billion in revenue from advertising, compared to competitors such as News Corp (NWS, Fortune 500). and CBS (CBS, Fortune 500), which rely on ads to bring in 45% and 72% of revenues, respectively.

"I like the dual income stream of the basic cable network business," says Gould "As a place for ads, it's still stickier than a car dealer advertising on a local network or in a newspaper."

Not everyone is convinced that Viacom can weather a recession. Goldman Sachs analyst Ingrid Chung told clients in a note Friday that, while she's taken a more positive view of Viacom shares recently, signs that advertisers are cutting back on their advertising in local markets could hurt Viacom if the slowdown becomes widespread. To top of page

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