Viacom turns bullish on prospects of management change

The CEO of Media and entertainment giant Viacom, Inc. (VIAB), Philippe Dauman, filed a lawsuit in the Commonwealth of Massachusetts Probate and Family Court to get a stay against his ousting by his mentor and media mogul Sumner Redstone who has a controlling stake in Viacom.

Redstone also removed Dauman from the Redstone Trust, which is authorized to control Viacom in case Redstone, 92, dies or becomes incapacitated.

While the two of them have taken to court, the shares of Viacom gained 3.38% to close at $41.30 on Tuesday.

The market perceives the removal of Dauman as positive, considering the lackluster growth of the company in the past few years.

CNNMoney

During the fiscal 2016 second-quarter, the company with brands such as Nickelodeon, MTV and Comedy Central posted a 3% decline in revenue to $3.001 billion, from $3.078 billion in the similar period of fiscal 2015. The second-quarter revenue was in line with Wall Street estimates.

For the second-quarter, the company, which owns Paramount studio, reported a decline in the non-GAAP net income to $303 million or $0.76 per share, from $467 million or $1.16 per share in the prior-year corresponding quarter. The consensus estimate of analysts was $0.79 per share.

Michael Morris, a media analyst at Guggenheim believes that the company has to concentrate on its strength and get back to content creation. Furthermore, Viacom needs to invest in core brands. For such a change to happen, the shareholders believe that a revamp of the management is very much required. The share value got eroded by 40% in the last year and investors are quite concerned. Thus, the market as a whole backs the removal of the CEO. However, it is not that easy as it seems so.

Dauman alleges that ailing Redstone is being manipulated by his daughter Shari Redstone, who is the vice chair of Viacom. Shari Redstone, once-estranged daughter of Sumner Redstone, currently takes care of her father. The lawsuit claims that Shari Redstone is trying to take over her father’s companies. Furthermore, the lawsuit alleges that Sumner Redstone is suffering from neurological disorders and cannot communicate anything meaningful. Thus, Redstone may have to prove himself in court that he is mentally healthy to make sound decisions.

In spite of this spat, ultimately, it now looks as if the change in the management is inevitable. An investor is ultimately concerned about that. Thus, fundamentally, the stock can be expected to rise in the short-term.

As the chart indicates, the stock has a major support at 36. The first major resistance exists at 45. The RSI indicator is just a notch above the reading of 50 and inclined upwards.

Thus, we can expect the stock to rise further as the market begins to validate the effects of a change in the CEO. In this regard, purchasing a one touch call option contract would be profitable. Selecting a strike price of $45 or lower will prove beneficial to the trade. It is also advisable to choose mid-June as expiry period.