Shares of Viacom Inc. (ticker: VIAB) have been discarded by investors like yesterday’s print newspaper. Flung on to the trash heap and now trading meekly in the mid-20s, the stock price reflects investors’ view the company is an aging dinosaur, soon to be put out of its misery by the likes of Netflix. Yet the shift from cable to online viewing is not unprecedented in the history of entertainment. If one looks back over the past 100 years, one can discern numerous distribution channel evolutions: vaudeville gave way to movies and radio, which then gave way to over-the-air television, which then gave away to cable, etc. The evolution continues—but the creators of content (as opposed to owners of any particular distribution channel) will always be needed.
With the likes of MTV, Nickelodeon, BET, Comedy Central, CMT and Paramount Pictures, Viacom has been and should for the foreseeable future continue to be one of the preeminent creators of content. Creating compelling content is their core competency. Consumers of media may migrate from cable to Internet TV, but Viacom should be able to migrate as well. Currently trading at an anemic 7X expected 2018 earnings, we believe that Viacom’s B shares remain a compelling investment opportunity for the patient investor, with our blended target price of $58/share representing an expected IRR of 31% over the next 3 years.