Wall St. Speaks Out on Viacom -RBC Capital Markets

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Viacom: Trying To Morph Marketing and Monetization Despite uncertainty surrounding looming DISH renewal, ratings declines and a temporary slowdown in the pace of capital returns, we believe VIAB's multiple compression is overdone given overall visibility in affiliate fee revenues, cost savings from restructurings and our own view of the Network TV Ad market. At ~10.3x (versus peers at 15.4x) on CY16, we believe valuation remains compelling.

Key points:

It's Early Innings, But Focus Is Clearly on Transforming Viacom Advertising Monetization Strategy—Viacom Vantage is now out of beta (after a year). Vantage, in combination with other initiatives (e.g. Velocity and Echo) is expected to help advertisers to better mine data for insights and offer better measurement across platforms. This should enable Viacom to more effectively target and sell audience as much as it sells content. While all traditional media operators have this goal in their long-term sights, Viacom's younger skewing target market (more susceptible to changing media consumption patterns) makes the initiatives more of an imperative. This, we believe, is core to Viacom's stated strategy to migrate ~50% of audience monetization toward non-Nielsen measured inventory.

Ratings Are Bigger Overhang than Ad Market Itself—Management noted that within the context of ~20% ratings declines, Domestic advertising revenue only declined ~5%. While that result isn't anything to get excited about, it demonstrates strong demand for inventory (as well as Viacom's ability to monetize content outside the Nielsen universe). Sequentially, we are expecting similar Domestic Ad growth, but we are expecting very modest improvement as the year progresses, bringing new programming and potentially broader cross platform ratings measurement.

F2Q15 Results In-line; Outlook Essentially Unchanged—5% Domestic Advertising declines met Street expectation, while 3% Domestic affiliate growth was ~150bps light (SVOD deliveries make this tough to model quarterly). In terms of global results at Media Networks, FX headwinds on Global revenues were offset in part by the impact of the acquisition of Channel 5. Ex-restructuring charges, EBIT was slightly ahead of expectations, but the bulk of the $0.10 EPS beat was below the line.

Continue To Expect Mid-Single Digit Affiliate Growth For FY15 And High-Single Digits In FY16—As VIAB comps the loss of Suddenlink and Cable One subscribers and likely benefits from new distributors, we remain confident that LT high-single digit affiliate growth is possible. We expect more of the targeting products referenced above to contribute to modest sequential improvement in advertising growth in FY16 (management has indicated that these new initiatives will be focused on the upfronts, which don't bear fruit till the next broadcast year (beginning in October 2015).

Valuation:

We derive a $78 price target for Viacom. We average our sum-of-the-parts, F2015E blended P/E multiple-based valuation, and DCF methodologies. We use a ~13x P/E multiple, as this is where publicly traded companies in the large-cap media space historically have traded.

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