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One day you're the head of a media empire that includes Paramount Pictures, Comedy Central, Nickelodeon and MTV. The next day you're unemployed. Welcome to the real world, Mr. Freston.
Viacom's (VIA, news, msgs) increasingly volatile chairman, Sumner Redstone, surprised Wall Street Tuesday by ousting Tom Freston and replacing him with Philippe Dauman and Tom Dooley, two men with long-term ties to Redstone who will split top executive roles at the company.
Unlike the announcement of a new CEO at Ford (F, news, msgs), Viacom's shakeup sent its stock down by 4.2% (the shares fell another 2.2% Wednesday). Ironically, one of the reasons cited for Freston's quick hook was the stock's lackluster performance (down 9.6% this year).
While the share price may have contributed to Freston's ouster, it certainly wasn't the main reason. If most analysts and investors considered a 10% decline more than a correction there would be many nervous CEOs.
Sudden change
Redstone's claim that the board concluded that the Street had lost confidence in management doesn't make sense. If anything, confidence is shaken by the abrupt change at the top.Viacom's new leaders need to quickly stabilize the company. That may be tricky because many on the Street expect a new media chief at Paramount and changes in the cable business, which has seen declining ratings, especially at MTV.
A shakeup in those units would be good news eventually, but also add to instability and keep downward pressure on the stock over the near term. Meanwhile the stock seems almost certain to retest the $30 area.
A good choice?
But before investors bail on the company altogether, they should consider that Dauman's background makes him a good choice to lead Viacom in the new media age. News Corp. (NWS, news, msgs) probably wouldn't have outmaneuvered Viacom for MySpace.com if Dauman had been at the helm several months ago.It’s also difficult to imagine that the likes of Walt Disney (DIS, news, msgs) would have beaten it to a deal with Apple Computer (AAPL, news, msgs) to deliver content over iPods.
These were Mr. Freston's real failures: he didn't think outside the box, didn't innovate and didn't set a bold course and then pull the trigger.
Redstone might well be the George Steinbrenner of the media world, but in firing Freston he was simply making his company more competitive and that's a good thing for shareholders in the end.
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Viacom is still a very attractive company with many very attractive assets. It was only late last year when the Street applauded the company's decision to spin off the slow, old-media CBS business to help bolster shareholder value.
Just because CBS's stock has outperformed over the last year, doesn't mean that was a bad move. It just means that Wall Street had inflated expectations of the benefits to Viacom.
Despite its troubles at Paramount and the declining ratings trend at MTV, Viacom is still expected to grow its earnings by 14% next year -- nearly a 20% premium to its industry.
And if the stock slips back to the $30 area, it would be very cheap at only 13 times estimated earnings -- well below the average industry multiple. By comparison, Disney and News Corp. currently trade at 18 times and 17 times next year's projected earnings.
Viacom is quickly becoming a compelling value play so investors will want to tune into the stock after static from the management shuffle wears off. Look for support in the $30 area to hold, with the stock climbing back to $38 to $39 over the next 12 to 18 months.
Robert Walberg is a financial writer based in Chicago, Ill. He was formerly chief equity analyst at Briefing.com. He is a regular guest on CNN's Moneyline. Mr. Walberg ran for Congress in Illinois in 1994.
At the time of publication, Robert Walberg did not own or control shares of any companies mentioned in this article.
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