Skittish Street

Analysts' tweaks send CBS, Viacom stock tumbling

NEW YORK — Wall Street revealed just how nervous it remains when investors sent stock of both Viacom and CBS plunging 10% Tuesday after relatively minor changes were made by some analysts to their third-quarter earnings predictions on the two companies.

The market sell-off caught Wall Street so much by surprise that some of the analysts backtracked on their own recommendations, calling the stock slide an overreaction.

“The market is nervous,” said Merrill Lynch analyst Jessica Reif. While the market has been on something of an upswing in recent days, anticipating an interest rate cut, Wall Streeters said jitters caused by the sharp correction in late August and early September remain close to the surface.

‘I’m outta here’

“The market is so skittish here that any kind of hint of negativity causes people to say ‘I’m outta here’ and find out what the truth is later,” said another analyst.

Reif started a sell-off in Viacom that took the stock price down almost $10 to a low of $53 after she reduced her third-quarter estimates for the entertainment conglom as part of her usual quarterly earnings preview.

Reif cited slowing growth at MTV, higher costs at Blockbuster as a result of its efforts to increase market share and lower profits from the publishing division as a result of “disarray” caused by the upcoming sale to Pearsonfor the slightly lower profit estimates.

Overall, Reif noted that Viacom’s cash flow — earnings before interest, taxes, depreciation and amortization — was now expected to increase 13.5% in the quarter.

Simultaneous estimate

Merrill Lynch’s importance on Wall Street means that Reif’s changes in ratings often have a big impact on a stock, but even she was surprised by the reaction to her note, which was reinforced by similar estimate revisions on Viacom released about the same time by Salomon Smith Barney analyst Jill Krutick as well as some bearish comments about the media sector from Deutsche Bank Securities analyst Alan Kassan.

Reif described her estimate changes as modest, and several analysts noted her revisions did not represent a significant alteration in Wall Street’s view of Viacom because her new predictions were roughly in line with those already published by firms such as Lehman Bros. and Montgomery Securities.

“There is no development in our business that would account for the drop in the price of our stock today,” a Viacom spokesman said, adding that the publishing sale was “on track” and all of the company’s other businesses are “performing very strongly.”

Parallel universe

In a parallel situation about the same time, Morgan Stanley analyst Frank Bodenchak reduced his predictions for CBS’ 1998 earnings and cut his target for where CBS stock should trade in coming months. The analyst nonetheless maintained an “outperform” rating on CBS.

Nonetheless, as a result, CBS tumbled as low as $21.87, down 15% on the previous day, although it later recovered to close down 10% at $23.06.

Bodenchak reduced his 1998 estimate of CBS’ cash flow by $100 million to $1.2 billion, citing both the impact on advertising of the General Motors strike and “more conservative” assumptions about the impact of the NFL contract and political advertising.

Fallout dismissed

A spokesman for CBS declined to comment on Bodenchak’s forecast but dismissed third-quarter fallout from GM’s short-lived strike as minimal and described political advertising as “not a big factor, particularly at the network level.”

The spokesman also expressed satisfaction with its television performance during premiere week of the new season, when CBS won the first week, ended Sept. 27, in terms of total viewers and households. It was CBS’ first such win since the 1993-94 season, the last time the network also broadcast NFL football.

On Wall Street, several analysts called the timing of Bodenchak’s downward revision odd, and some indicated the analyst may have been overly optimistic at the outset.

“He essentially came down to where we were,” one analyst said on the condition of anonymity. That CBS stock dropped so much, this analyst continued, “reflects a large amount of nervousness in the market.”

Analysts rally

Bodenchak did not return repeated calls seeking comment, but analysts covering Viacom were more vocal, coming out in force in midafternoon to try to calm down the market.

“We view today’s stock price weakness as an overreaction and an attractive buying opportunity,” Krutick said in a note to clients in mid-afternoon.

Reif put out a brief note saying bluntly “Viacom shares are weak today … this appears to be an overreaction by the market.”

As a result Viacom stock recovered somewhat to close down just $6 to $56.75, down 19% from its high of $70 hit in July.

Wall Street crix

Some on Wall Street were critical of the analysts’ reassurances to investors. “Clearly it’s a sign that the market doesn’t have any kind of conviction. At the first sign of upset, they turn tail,” said one investment banker.

Ironically, the market sell-off prompted some analysts to come forward with their own views of Viacom. Schroders & Co. analyst David Londoner, for instance, put out a note to clients that said Viacom was not expected to report numbers “as high as we had hoped, (but) we are not concerned with the shortfall.”

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