Viacom Inc.'s shares tumbled more than 10% on Tuesday as two analysts lowered their ratings on the stock, illustrating investor jitters about entertainment stocks as well as the market at large.
Nonetheless, several industry analysts were puzzled by the size of the drop, saying the company’s prospects continue to be strong because its debt-heavy balance sheet is improving and some Viacom units such as Paramount Pictures are generating stellar results.
“There’s no new news here. The fundamentals of Viacom Inc. are superb,” said Christopher Dixon, an analyst with PaineWebber Inc.
Viacom’s Class B shares, the most widely held of its securities, fell $6.88 to close at $56.75 on the American Stock Exchange. The stock, which has doubled in price in the last year, was down $10 at one point during the day.
Viacom, which normally doesn’t comment when its stock fluctuates, took the unusual step of issuing a statement that the performance of its business units is healthy, the turnaround of its Blockbuster video chain continues and that such transactions as the sale of the bulk of its Simon & Schuster publishing unit to Britain’s Pearson are proceeding.
“There is no development in our business that would account for the drop in the price of our stock today,” the statement said. “The publishing transaction is on track. All of our other segments--Blockbuster, the entertainment group and the broadcasting group--are performing very strongly.”
The sell-off was apparently triggered when two entertainment analysts, Deutsche Bank Securities’ Alan Kassan and Merrill Lynch & Co. analyst Jessica Reif Cohen, trimmed their earnings estimates for the company and reduced their ratings to “accumulate” from “buy.”
Viacom’s plunge provoked a flurry of bulletins from other analysts, some of whom also cut estimates of the company’s earnings and cash flow.
Some expressed concern about increased spending by Blockbuster, especially on promotions and marketing.
Analysts also worry that Walt Disney Co.'s recent announcement forecasting soft results, in part due to slower video sales, does not bode well for the industry and may indicate saturation in the video business.
But brokerage Salomon Smith Barney said it views the development “as an overreaction and an attractive buying opportunity.”