• by David Goetzl  @dgoetzl, December 3, 2007

Bear Stearns said Friday that Viacom is its "top pick" in the entertainment sector--a striking projection, considering the company was accused of failing to adapt sufficiently to its younger audience's hunger for new media. But analyst Spencer Wang's robust outlook was based not on upgrades in Viacom's Internet operations, but "old-time" ratings jumps at profit-driver MTV and a soaring scatter market.

The prediction could have been offered in 1998, rather than a look toward 2008. It would seem to indicate that if a network offers appealing programming, viewers--even teens--will come.

Overall, Bear Stearns said its bullishness on Viacom is based on 90% of one earnings metric coming from cable programming, "which, as a category, is growing faster than most traditional media with the exception of possibly outdoor." Viacom's peer group, according to Bear Stearns, includes Disney, Time Warner and News Corp.

Viacom closed Friday with its share price at $42.02, below the 52-week high of $45.03 reached in May. Media stocks have been middling lately.

In November, ratings at MTV increased 22% in the 18-to-34 demo, "helping to dispel concerns that ratings softness among Viacom's younger-skewing channels are secular in nature (i.e., due to more time spent online by teenagers)," Wang wrote.

The ratings also appear to be driving scatter-market demand, with Wang saying pricing is up 40% to 100% over the upfront at MTV. Scatter should continue to stay strong, due to inventory tightness coming from a shift to commercial ratings as currency early next year and a higher sellout level in this year's upfront, he wrote.

The report projects a 7% growth in Viacom cable network revenues in 2008 to $8.5 billion--that's actually significantly less than this year, but earnings are projected to grow at a notably higher rate in 2008.

After a sustained slump, a Bear Stearns breakdown of Viacom's nine largest networks shows that when taking the target demo for each--adults 18-to-34 for MTV, kids 2-to-11 at Nickelodeon--average ratings are up 3.1% in November compared to a year ago and 2.2% for the fourth quarter so far. With its 22% jump, MTV propelled much of the increase, Wang said, citing shows such as "The Hills" and "Real World: Sydney." MTV's fortunes are critical for improving overall performance, since it accounts for such a large share of revenues.

(One notable weak spot was male-targeted Spike, which offers popular Ultimate Fighting Championship programming, but has seen fourth-quarter ratings drop 9.1% so far. And though Comedy Central could begin to slide, due to the writers' strike affecting its "Daily Show" and "Colbert" franchises, ratings are still up 3.8% so far this quarter.)

Expectations that ratings will continue to improve through the end of the year is a continued source of optimism, Wang wrote. He projects a continued turnaround at Viacom similar to Discovery, which showed improvements after multiple quarters.