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With Nick Ratings Still Down Analyst Cuts Viacom

Remember when Viacom CEO Philippe Dauman told analysts that there had been an “inexplicable” drop in Nickelodeon’s ratings starting in September? That weakness has persisted and one analyst has cut his rating on Viacom’s stock.

In a research note Monday, David Joyce of Miller Tabak + Co. cut Viacom from a “buy” to neutral “due to the continued ratings pressures primarily at the Nickelodeon kids-targeted network.” For the week of Nov. 20, Nickelodeon’s total day total viewers was down 16.7%, he wrote.

Joyce notes that Nickelodeon isn’t the only kids’ network getting lower ratings, indicating the problem might be with Nielsen. Nevertheless, for the time being, the lower numbers mean that Nickelodeon could be forced to provide additional commercial time inventory to advertisers, which would pressure ad revenue for the current quarter.

Nickelodeon provides Viacom with a huge profit. According to SNL Kagan, the kids channel has the biggest cash-flow margin in the cable business at nearly 65%. A sudden loss of revenues would drop a boulder in that stream.

Joyce says that he’s lowering his revenue estimate for Viacom’s Networks unit to $2.66 billion from his prior forecast of $2.7 billion. He now sees domestic ad revenues growing at 11.3%, down from $13.7%, because despite a strong upfront, lower ratings and make good will drag the growth down.

That’s part of the calculations that lead Joyce to conclude that Viacom’s first quarter net income will be $607 million, down from his previous $701 million estimate, and that cash flow will be $762 million instead of $858 million.

Meanwhile, as the bigger kids return to play, another analyst, Anthony DiClemente of Barclays Capital, says the tentative NBA deal is only a “small positive” for Time Warner, parent of Turner Broadcasting, and neutral for Disney, which owns ABC and ESPN.

“In a macro environment where uncertainly weighs on earnings estimates for the media companies, we believe the lockout resolution should help lift any NBA-related overhang on Time Warner and Disney stock, and could even result in modest upside to muted ad growth expectations,” DiClemente said in a research note.

NBA related revenue will be down because the regular season will be shorter, he said. But margins should be higher, partly because replacement programming was cheap. A pro-rata portion of the $900 million in annual rights fees should be refunded to the networks by the NBA, or the networks will get more games to televise as compensation, he added.