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NEW YORK – Highlighting Wall Street’s lack of faith in entertainment, investors have sold down stock in Viacom Inc. over the past week on signs that the company’s Blockbuster video chain had a disappointing fourth quarter – despite other signs indicating that the shortfall was offset by improvement elsewhere in Viacom’s businesses.

Viacom stock has slipped 7.5% in the past 10 days to Monday’s close of $34, as word has seeped out about Blockbuster’s fourth-quarter performance at an investor conference in California last week. Viacom execs have also warned money managers in private briefings about the quarter, sources say. Viacom declined comment Monday.

Analysts have revised downward their projections for Blockbuster’s cash flow by about 10%, from the $210 million-$220 million range to below $200 million. Merrill Lynch analyst Jessica Reif, for instance, said in a report last week that Blockbuster would show “an increase of only 4% due to modest growth at video,” hurt by increases in Blockbuster’s videotape inventory.

“There is no question that Blockbuster is lower, from where we were,” Reif said Monday. But she added that the shortfall was covered by better-than-expected growth at MTV Networks and Spelling Entertainment, and said investor reaction to the Blockbuster numbers didn’t make sense. Reif predicts that Viacom will increase cash flow by 27% to $570 million in the quarter.

Growth slowdown

Blockbuster contributes about one-third of Viacom’s total cash flow. A slowdown in its growth over the past year put the brakes on Viacom’s overall earnings growth so, one analyst said, any further news of slower business at the video chain causes investors to worry. Wall Street is worried both about the impact of discount retailers on Blockbuster’s video sell-through business and the longer-term threat to video rental from pay-per-view.

Also worrying investors is the message that changes being introduced by Blockbuster’s new management team, led by former Wal-Mart exec Bill Fields, won’t have an impact on earnings until the second half of 1997. While Viacom has made that clear for several months, analysts concede, it is only hitting home to some Wall Streeters now.

Cushioning the blow

People close to Viacom concede that investors are worried about Blockbuster and were looking for a turnaround. But sources noted Viacom had emphasized in meetings with money managers that the video chain’s growth would be modest until Bill Fields implements his plans, both to broaden the chain into an entertainment retailer and to make better use of a customer database.

Money managers said Monday the negative response to Blockbuster’s outlook simply highlighted how poorly the entertainment sector is viewed by investors generally. “They have to deliver something. They have to show that Blockbuster is fixed,” said CRI Media Partners principal Ellen Gibbs.

“I think we are at an emotional stage right now,” said another money manager, adding that Viacom “looks a lot better to me than the stock price (indicates).”

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