The Motley Fool says Viacom an interesting investment option

The Motley Fool Take

Media and entertainment giant Viacom (Nasdaq: VIA) has seen its shares drop more than 25 percent over the past year, but that just presents an interesting opportunity for investors.

The company’s media networks include Nickelodeon, Comedy Central, MTV, VH1, Spike, BET, CMT, TV Land, Nick at Nite, Nick Jr., Logo, Nicktoons, TeenNick and the Paramount Channel, reaching 3.4 billion viewers worldwide. Its Paramount Pictures division is a major motion picture company, with recent hits such as “Interstellar” and “Mission: Impossible — Rogue Nation.”

Viacom offers much promise of growth, too. Its “Transformers” franchise features four films that have collectively grossed more than $3.7 billion worldwide, with another movie on the way in 2017. The 2013 “World War Z” movie grossed more than $500 billion globally, but didn’t play in China. If Viacom gets it onto Chinese screens, dollars will follow.

“Teenage Mutant Ninja Turtles” grossed more than $480 billion worldwide and has a sequel coming up in 2016. Less promising is a drop in cable TV advertising revenue, a trend Viacom needs to overcome or offset. That will likely take time.

The company’s free cash flow tops $2 billion annually, and its net profit margins are in the double digits. With a recent price-to-earnings (P/E) ratio near 12, a five-year expected growth rate of 12 percent and a dividend yield recently topping 3 percent, Viacom is worth consideration for patient believers.

Ask the Fool

Q: Why does some good news from a company send its stock price up, while other good news from it does nothing? — J.P., Owasso, Oklahoma

A: It depends on what investors have been expecting. Imagine that people following Typewriter Land Inc. (ticker: QWERTY) have noticed that the company’s sales have been really picking up in recent months. Its stock price may steadily rise, as more people, excited by its prospects, pile into it.

Then imagine that Typewriter Land reports a 40 percent surge in earnings in its last quarter, more than it had forecast. If that’s kind of what investors had been expecting, the stock might not move much on the great news. But if investors were expecting a significantly higher or lower growth rate, you might see the stock jump up or down. Sometimes news isn’t really news.

Q: What does “pro forma,” which I see on some financial statements, mean? — D.E., Lexington, Kentucky

A: It means that you’re looking at some what-if numbers. Imagine that Acme Explosives Co.’s (ticker: KBOOM) fiscal year runs from January through December. Let’s say that Acme merges with Roadrunner Industries (ticker: BEEEP) in April. AcmeRoadrunner’s next annual report might feature some pro forma financial statements, reflecting the condition or performance of the company over the year as if it had been a combined company all year long.

Pro forma results can be useful. If you were researching AcmeRoadrunner Inc., you’d want to be able to compare apples to apples. It wouldn’t be very insightful to compare its results in a pre-merger period with those of a post-merger period. By examining combined results, you can get a clearer idea of the company’s financial health and growth.

My Dumbest Investment

In the 1990s, I was just beginning to become computer literate. I learned DOS/Windows, started banking online and eventually began thinking about investing. I wanted to invest in shares of Apple when Steve Jobs returned to the company in 1997, but at that point, my bank started having issues with its server. I stopped trusting online banking and didn’t pursue investing much, other than parking some money in a few CDs. I didn’t return to online investing until the mid-2000s. — D. Parker, Philadelphia

The Fool responds: You were apparently a very early adopter of online banking. According to the American Bankers Association, most Americans now prefer Internet banking to other methods of banking, and mobile banking, conducted via smartphones and other devices, is gaining ground. In the late 1990s, though, only a few banks offered online banking services, and they weren’t as sophisticated as those of today. Many people were successfully investing online in the late 1990s, and brick-and-mortar brokerages were an option, too.

Your interest in Apple’s stock was clearly well-founded, as shares have risen by an annual average of nearly 35 percent in the 18 years since 1997 — more than 200-fold. That would have turned a mere $3,000 investment into more than $600,000! In the years following Steve Jobs’ return, Apple rolled out hits such as the iMac, iPod, iTunes, MacBook and, very importantly, the iPhone, which debuted in 2007.