nihar patel - viacom report

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management Nihar Patel [[email protected]] Viacom Inc., Class B (VIAB) November 18, 2016

Consumer Discretionary – Media & Entertainment Stock Rating Buy

Investment Thesis Target Price $49-53 The media and entertainment industry is undergoing a change as more content moves to online platforms. Viacom operates in two segments Media Networks, which includes most traditional television, and Filmed Entertainment, which includes movies. The company recently had a rough CEO change and a few failed films that has hurt revenues. The company has two share classes, Class A and Class B. Class A is voting and that is the only difference. 80% of the voting Class A shares is controlled by one company that is owned by one family. CBS is also contemplating a merger, and it has the same structure and majority owner as Viacom. Investment Positives The recent trouble in the company has led to the stock being sold off than

its fundamentals would suggest. Between the messy CEO replacement, weak performance at the box office, and one family’s control of the company there have been many headwinds.

A merger with CBS could produce a leaner company with a larger content library. That may create the capacity to launch its own online platform, which is critical if the company intends to stay relevant into the future.

The company’s strategic plan is to go back to integrating its two lines of business as it used to do. The goal is to create movies that drive television views, and use television to bring people to the movies. This could bring filmed entertainment back to normal, which would be a major boost for the company’s returns.

In the DCF model, we have used conservative assumptions as needed, and there is still plenty of upside in the stock. However, the uncertainty inherent in the business can change the story very fast.

Investment Negatives The Redstone family continues to control the company. The CEO debacle is

not the first controversy that has been caused by the concentration of voting shares.

Traditional television is in a decline with the shift to streaming, and this segment still makes up most of Viacom’s revenue. The company does not currently have a fast-growing alternative that could replace this revenue segment.

Henry Fund DCF $52.68 Henry Fund DDM $43.64 Relative PE (EPS17) $51.52 Price Data Current Price $37.77 52wk Range $30.11-52.95 Consensus 1yr Target $42.59 Key Statistics Market Cap (B) $15.15 Shares Outstanding (M) 397 Institutional Ownership 90.70% Three Year Beta (weekly) 1.4000 Dividend Yield 2.1% Est. 5yr Growth 4.5% Price/Earnings (TTM) 10.67 Price/Earnings (FY1) 9.9 Price/Book (mrq) 3.5 Profitability Operating Margin 21.88% Profit Margin 11.50% Return on Assets (TTM) 6.42% Return on Equity (TTM) 36.75%

Earnings Estimates Year 2014 2015 2016 2017E 2018E 2019E EPS $5.77 $4.83 $3.62 $4.56 $4.74 $4.78

Growth 8.29% -16.36% -24.97% 26.00% 3.86% 0.47% 12 Month Performance Company Description

Viacom Inc. is a media and entertainment company that operates television channels, produces content across all kinds of media, and distributes films. Revenue is generated through two segments media networks and filmed entertainment. The company operates numerous brands and owns many franchises. More than some of its peers it relies more on marketing and sees itself as a marketing firm

10.76.4

36.7

17.8

10.4

20.315.8

6.9

18.618.12

6

20

0

25

50

P/E ROA ROE

VIAB DIS TWX FOXA

Data Source: FactSet

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

N D J F M A M J J A S O

VIAB S&P 500 TR

Data Source: Factset

EXECUTIVE SUMMARY

Our recommendation on Viacom Inc. is a buy. The company has faced some recent trials with a few film productions doing poorly and a messy split with its former CEO. The distraction for management is done and the company can focus on creating broad content offerings that will sustain it into the future. We have taken conservative assumptions in valuing the company, and still see significant upside. There is no indication that the company’s operations are in a sustained downward trend. The decline in the share price has been an overreaction.

There are lots of unknowns when it comes to media companies. They make their money through advertising, affiliates, and customer purchases. All the revenue boils down to a product that people want to watch. There is no way to know if a production will be successful, but all the costs are borne upfront. This makes their results open to significant volatility. However, media tends to be a bit more defensive than other industries. People tend to stay home and consume content when times are hard, because a movie or TV is cheaper than traveling or other expensive hobbies.

Traditional television faces significant pressure, but it is still surviving. The key thing to look for into the future is Viacom developing a strong strategy to content with the disruptive effect of the move to streaming. Other than that, we are not projecting any major changes to the business.

Competition is fierce, but nothing can be done about that. Producing better content is the key to success, and the audiences will judge. Two good movies from two different companies will both make money. With DVR and on-demand even television is no longer restricted by time. In the past ratings meant something, but since people can record their shows that matters less now.

The case for Viacom being a buy is a simple one. Even with little expected growth in media networks and a return to normal in filmed entertainment, the DCF model is showing a buy. The market may have reacted too negatively to the company’s recent travails.

COMPANY DESCRIPTION

Viacom is a global media company that owns and operates numerous television channels, produces films, and a range

of other content. The two primary segments of the business are media networks and filmed entertainment. Under media networks, Viacom owns brands like BET, MTV, Nickelodeon, Spike, TV Land, and many others.1 Under the filmed entertainment segment brands such as Paramount and the film version of the network brands. These are well recognized brands in media. Media segments is the far larger segment, but probably the one under the greatest threat. The rise of cord-cutting and streaming has disrupted the television industry, and the movie industry is tough to dominate for a variety of reasons.

Some of Viacom’s Brands:

Source: Viacom Brands

The segments bury a significant truth about Viacom. It is not a media company that seeks to sell its media products.

78.88%

21.12%

Viacom Revenue Breakdown 2016

Media Networks

Filmed Entertainment

Source: Viacom's 10-k 2016

It generates much of its revenue from advertising not from simply selling its content. While this is always true for most television content, it is also true for films in Viacom’s case.

Media Networks

Media networks are driven almost entirely by advertising revenue. This makes the segment very cyclical and extremely competitive. There is some value to generating content and selling it via physical media or online, but this is dwarfed by advertising revenue.

Media networks generate revenue by attracting advertisers due to the number of people watching their content. However, the other major part of media network revenues is affiliate fees.2 These are the cut of cable fees when people subscribe to the channels, like getting the Comedy Central or Nickelodeon package.

Predicting the advertising spend cycle is very difficult. Media exhibit some defensive characteristics due to people staying at home more. Therefore, it is best to pick a modest trend and continue this, rather than trying to guess at when spending will be high and low. However, when advertising spend decreases due to companies having cash flow issues such as in 2008 it can lead to cutbacks. Another aspect of the advertising business is the product placement that happens in all media. Usually these spots are used to offset production costs in new shows, and to bring in revenue with popular shows.

Recently the main issue has been the decline in cable television. Cable has not disappeared and is still a major industry, but it is in a secular decline.3 Viacom has yet to

leverage online platforms to their full potential, but it is not too late for this shift to occur.

Filmed Entertainment

Filmed entertainment is even more volatile. It is cyclical, but by its very nature it is also more volatile. Films are deficit financed like television shows, but unlike running a television channel there are not reruns or one-offs to fill the schedule. Film are large projects whose production is financed entirely before the first revenue dollar even comes in. Then there is the additional expense of marketing the films.

Filmed entertainment includes distribution and production with variations within those categories. Many of the films are co-productions with other studios, or Paramount is simply the distributor. Upfront, high costs make this an industry where companies spread as much risk as possible. In theaters, there is not as much incentive to compete. Rather having different release schedules or targeting different types of audiences during the same day.

The money in movies at Viacom is not as high as some other names. Disney for example makes a lot of money from ticket sales, but in the whole year Viacom made less than a billion dollars. Prior years are not broken down, but revenue has never been that high considering the number of movies. This is probably due to its role as distributor and a co-producer, but it also employs a different strategy.

48.37%

45.83%

5.80%

Media Networks Breakdown 2016

Advertising

Affiliate

Ancillary


22.73%

29.41%

41.32%

6.54%

Filmed Entertainment Breakdown 2016

Theatrical

Home Entertainment

Television License Fees

Ancillary


Disney currently uses its outside film offerings to drive people to their movies. While the shows on Netflix and television provide some revenue, it is the mega-blockbusters that Marvel churns out that generate money.

Disney’s animated features somewhat support its television offerings, but Viacom leverages the ecosystem far more.4 It has consistently made movies that target children, then release related shows to drive viewership. The Madagascar series spawned a television show on Nickelodeon, which later spawned a movie. It is that targeting that makes Viacom different from other film companies. It targets a segment to build an ecosystem broader than just films, rather than aiming for mass appeal blockbusters. This targeting also gives it a powerful marketing channel for companies trying to reach their audience. Product placement helps offset the costs of production, and can provide some revenue in established franchises.

Viacom, via subsidiary Paramount, has often treated its film business as a potential marketing channel. The shifting of targeted audiences from film to television through related media is probably the reason that Viacom has remained healthy despite the decline in network television, however growth has become more difficult.

Viacom’s Share Structure

Viacom has both A, VIA, and B, VIAB, shares. The sole difference is that the A shares are voting and the B shares are not. Therefore, the A shares trade at a premium. 80% of the voting shares of Viacom are controlled by National Amusements a company controlled by Sumner Redstone and eventually his family trust.

Looking at the historical difference between the value of Class A and B the divergence is large. At one point the shares were at parity, and during high volume periods Class B shares have drifted above Class A shares by a few cents. The most common gap has been around $1.25, but recently it has moved to around $3. Since one party controls 80% of voting shares there is not much value to holding the remaining voting shares. Even in the event of a merger with CBS the fairness test will be applied, but minority holders would not be able to vote en masse to block a deal to get a higher price if a court rules the existing terms are fair. The valuation and percentages treat A and B shares the same, but any reasonable adjustment would still place Viacom heavily in buy territory.

RECENT DEVELOPMENTS

Viacom has faced some challenges in the last few years stemming from internal upheaval, and a few missteps in the filmed entertainment division.

Fiscal Year 2016 Earnings

Viacom just reported their 2016 annual results in November. The company beat on EPS by $0.04 but missed on revenue by $70M.5 The miss was due to losses in the filmed entertainment division. A few projects failed to deliver large returns, and the company expensed some items for an upcoming project that was expected to fail.10

Strategic goals going forward include leveraging technology to improve its advertising. It will also attempt to take its media network brands international and do better with appealing to more markets under its existing brands. Integration between television and film is also sought, and this should really help bring results back to growth. However, the model does not project this, so it would form additional upside.

CBS Bid

Viacom is currently an acquisition/merger target for CBS. However, this is only in the exploratory phase and nothing has been detailed yet. CBS is another Redstone family controlled entity. It has a dual share structure, one voting and one non-voting, with 80% of the voting shares held by National Amusements. This is more than coincidence. Ten years ago, Viacom and CBS split into two entities, both controlled by National Amusements and Sumner Redstone. With the difficulties facing traditional television National Amusements sent a letter advocating a combination.

If this proposed merger moves into the next stage it will take quite a bit of time, and likely not yield much of a premium. Approval will also be slow since the same party controls both entities. This will trigger what is called the entire fairness doctrine as described in Golden Cycle, LLC vs Allen by the Delaware Chancery Court in 1998.6

This doctrine is triggered during a merger or acquisition when a majority stockholder is on both sides of the transaction. This rule is designed to prevent minority shareholder interests. Any deal that will see Viacom and CBS merge will probably see a lawsuit and a court must

determine the fairness of the transaction in addition to all the other approvals required of takeovers.

CBS is facing similar challenges to Viacom, and it may be similarly undervalued. This is not a case of one very healthy company buying a company that has stumbled. For this merger to really benefit shareholders the new company would need to be far stronger than the two separate companies. With Viacom so undervalued it might be worth it to hold onto any shares gained from the transaction. There may be synergies to be leveraged from the combination of content libraries and production facilities.

Replacement of Long-Time CEO

The CEO of Viacom Phillipe Dauman was replaced in August 20, 2016 after an acrimonious court battle with the head of the company that controls the voting shares of Viacom Sumner Redstone. The crux of the issue was that Dauman believed that Sumner Redstone was no longer capable of making decisions and his daughter Shari was controlling him, which his will indicated was what he did not want. This is just another example of family and personal disputes spilling into the public sphere due to the tight control of voting shares by one family. If this situation with control were ever to change, it would be a major boost to the company.

Since that family controls 80% of the voting shares the escapades of the Redstone’s have frequently become an issue hanging over the head of Viacom. Headlines aside this has always been the case, but if Viacom’s ownership structure ever changed it would be a positive. This drama at the top has created an opportunity in the stock. Dauman was also one of the highest paid CEOs in America with about $85M on average between 2011-2015.7 His replacement will not be paid as much, so there are some savings to be had there.

INDUSTRY TRENDS

The media industry by its very nature is on the forefront of technology, culture, and globalization. There are many sweeping changes facing the industry. Some are recent, and some have been going on for some time now.

Shift to Streaming

In the last few years streaming has taken off as the primary way for people to consume their content. This is especially

true for the young, which will define the future for many more years to come. Netflix, Hulu, Amazon Prime, and iTunes have changed the field, but those have been picking away at television’s base for many years. These companies have also turned to generating their own content, competing with traditional media more directly.

The television channels have tried to stem this tide. Companies like Sling TV try to blur the line between television and Internet streaming by bringing traditional television streaming through the web. However, the offerings, features, and cost of these programs leaves much to be desired. Very little of the shift is driven by cable versus the Internet, and their strategies seem to be missing the point. The shift is driven by immediate consumption without interruption for a reasonable price. Cable costs too much, and more and more people are cutting the cord, but that does not mean they are moving to Sling TV. They are moving to on-demand streaming, not just streaming.

This trend is the biggest threat the media network revenues, which is the largest group of revenues. There is some exposure in the filmed entertainment segment due to a decrease in licensing fees for television movies, but this can be made up with licenses with streaming companies. Media networks on the other hand is driven by advertising and that is dependent on the number of people. Licensing fees currently would not offset this decline. The audience for television is shrinking. Movies are still big draws and box offices have continued to grow, but on the small screen everything is moving online.

Global Markets

Movies have become very expensive to produce, though Viacom does not do many of these. This expense has

caused international markets to become very important to the viability of movies.8 In the past doing well in the US box office was enough. Now it is not enough. That means that movies should have broad appeal to many types of audiences. Some of the recent movies released by Paramount have struggled. This could be due to their narrow focus on mostly the domestic market, but it is competing against major franchises with broad appeal and an established fan base.

Viacom has not created many franchises other than a few children’s movies. Its role as a distributor also means it comes in far later in the production cycle. It also creates increased competition as there are many global distributors, and simply focusing on the American market is not as lucrative as it once was.

MARKETS AND COMPETITION

The media industry is completely fragmented with players of all sizes and partnerships that form and dissolve on a regular basis. Two companies working on the same production may have projects that directly compete later. There are tiny independent studios, some of which form for one project, and there are mega studios like Marvel that produce numerous movies. Early in the cycle of the Marvel movies Paramount was a distributor, before Disney took over.

On the film and media production side the industry is full of players. The television channels do compete in a more traditional way. Channels compete against one another to grab the most viewers in the target demographic. Broadcast television tries to capture the broadest audience, while network TV can be more specific.

Competition

The competition in this industry across all the segments is very simple. Attract the most people to your product. This is done by producing quality material, making it readily available, and marketing it well. With movies, the goal is to sell tickets, DVDs, licenses, and merchandise. When done well a franchise can be created that has numerous media products and potentially other entertainment products to perpetuate the concept into the future.

An ideal situation would be obtaining a place in the minds of the public with a franchise. A recognizable and beloved idea can always be relied on to generate revenue to the

extent that care is taken. Despite the negative reviews Teenage Mutant Ninja Turtles remains a profitable franchise, eventually more movies well be made. The upcoming Power Rangers movie is based on a show that is going on 25 years, and if successful will likely revitalize the television business.

Television is about attracting viewers to increase revenue from advertising. Slots are sold to advertisers. Lots of viewers for a show generates a lot of ad revenue. A show with very strong demographic numbers can attract valuable targeted advertising dollars, which are more per viewer. This is the most well-known form of revenue for television channels.

The other source is affiliate payments, which are primarily for network television. When a cable subscriber has a channel in their plan that channel gets a payment. This varies based on whether the channel is a common offering, a premium channel, etc.

All the companies are competing for the interest of the population. Competition is very high and fierce, but success depends on quality. A slick marketing campaign can get viewers onto a new show, but it cannot save a terrible show.

Source: www.the-numbers.com/market/distributor/paramount-pictures

Year Movies Market Share Gross

1995 21 9.97% 529,884,404.00$ 1996 24 12.80% 740,924,146.00$ 1997 27 13.99% 889,415,108.00$ 1998 19 15.46% 1,046,011,656.00$ 1999 21 11.56% 848,754,297.00$ 2000 19 10.42% 785,491,260.00$ 2001 18 11.02% 914,413,744.00$ 2002 25 7.35% 673,939,881.00$ 2003 23 7.11% 653,849,399.00$ 2004 18 6.73% 624,885,940.00$ 2005 17 9.32% 821,959,361.00$ 2006 19 10.30% 947,010,659.00$ 2007 21 15.38% 1,502,551,245.00$ 2008 17 16.38% 1,602,712,839.00$ 2009 16 13.72% 1,460,075,602.00$ 2010 18 16.44% 1,727,156,249.00$ 2011 23 19.31% 1,966,886,567.00$ 2012 22 8.47% 933,803,997.00$ 2013 15 9.01% 981,549,932.00$ 2014 17 9.92% 1,027,851,276.00$ 2015 17 6.17% 697,086,594.00$ 2016 14 6.93% 655,775,020.00$

Year by Year Market Share

Peer Comparisons

It is important when doing peer comparisons to keep the stuff above in mind. So much of a company’s success is dependent on creative matters, and the ability to execute on a good idea. Capital constraints are why these companies make deals with each other. Spreading the risk is safer than going it alone in all cases, especially when upfront costs get large.

While television stations still compete with one another, DVR and streaming means that quality always wins out. There is a lot of market to be had. People are consuming more and more content, and there is no brand loyalty. People will watch everything they enjoy.

Debt and Liquidity Long-Term

Debt ($M) Current

Ratio Quick Ratio

Viacom 11,913 1.23 1.00 Time Warner 24,471 1.76 1.51 Disney 16,674 0.91 0.83 Discovery 7,926 1.76 1.76 21st Century Fox 19,488 2.01 1.57

Source: Factset

Liquidity is not a risk for Viacom. These media companies do not have high CapEx or other expenses. Most costs are associated with producing the content. These expenses are high risk, since they are upfront in their entirety. Disney is a bit different because it is a conglomerate with many kinds of businesses.

Margins Net

Margins Operating Margins

PE

Viacom 11.5% 21.9% 10.69 Time Warner 15.6% 25.8% 15.84 Disney 16.6% 25.7% 17.76 Discovery 17.1% 32.4% 15.46 21st Century Fox 10.5% 22.5% 18.12

Source: Factset

Margins for these companies vary greatly due to the nature of their business. Viacom’s margins have been hurt by the recent weakness in its filmed entertainment business. From the PE ratio, we can see how the recent events at Viacom have impacted the share price relative to its peers. While Viacom has experienced some weakness, it has not seen a very dramatic decrease in EPS.

Returns and Free Cash ROA ROE Free Cash

Margin Viacom 6.4% 36.7% 9.6% Time Warner 6.9% 18.6% 13.8% Disney 10.4% 20.3% 14.1% Discovery 7.0% 20.4% 22.3% 21st Century Fox 6.0% 20.0% 14.6%

Source: Factset

Viacom’s cash flows have suffered recently. A few years ago, the company authorized a $20Bn repurchase plan, and it made use of this to buy back shares this last year. This has boosted its ROE.

ECONOMIC OUTLOOK

The media industry shows some defensive characteristics, because when the economy is weak people stay in and watch TV or stream movies. While plenty of people complain about the price of movie tickets it is cheaper than a trip. The real issue is when corporate earnings weaken and they cut down on advertising spending. Usually this leads to declines in revenue not the absence of them. Television always has commercials.

We expect the economy to remain strong in the next few years. Box offices have continued to grow. The companies are breaking into more markets. For English language content the market is becoming much more global.

While the market will continue to expand that just means more companies can come in to fill the demand. Even with large amounts of capital doing too many productions at once poses serious risk. Directors, actors, editors, post-production specialists, and other professionals are not endless. There is also limited time, and there is little incentive to compete head to head on every occasion.

So, there are no specific macroeconomic issues that should be of concern. The recent low debt environment has allowed firms to take on debt to finance more product themselves, because they will accrue more of the benefit. However, the low rate environment created this demand. For Viacom, which does not run a cable service just channels, it does not need to rely on debt in the future for CapEx. One of the bigger drivers will be increasing wealth in emerging markets, which would open more markets and expand existing ones.

VALUATION

Revenue Growth

Revenues are extremely unpredictable in this industry. While there are certain predictable revenues from the media networks business the filmed entertainment branch is subject to the market’s reaction to the product. Estimates can be made on sequels and related movies, but brand new movies are inherently unpredictable.

When it comes to modeling the growth rates, we chose to use analyst averages and adjusted them downward. As this is not a current holding we feel this cautious approach will yield the clearest signal. Media networks are projected to grow at 1.5% next year, right around inflation levels, and move down to 0.5%.

Verizon’s Revenue Growth

2014 -0.08% 2015 -3.74% 2016 -5.88%

Source: Viacom 2016 10-K

Filmed entertainment is trickier. The last few years has seen revenue decline due to a variety of factors. Some are due to missteps, and some are due to the former CEO Dauman’s plans for the movie segment. Viacom got involved in some high-quality projects such as The Big Short and Interstellar before that. These films just tend to be outside their normal space. Children’s movies push viewers to their media network properties, and generate follow-up short films, DVDs, and licensed products.

While Interstellar and The Big Short were high quality pictures they had niche audiences and were not something Viacom could continue to leverage. They were only distributor, but they could easily make a partnership to do more. In addition to that subtle shift a few of the recent movies did not bring in much revenue. The segment has seen a decline from over $4bn a few years ago, to between $2-3bn now. We project the revenue next year will grow 7%, simply to bring them into line with the company’s size and general performance. It remains conservative relative to analysts.

The effect of these growth numbers boils down to 2012 and 2021, the end of our forecast, having revenues that are very close $13,887M and $13,923M respectively. This is one of the reasons we are confident in our buy recommendation, though not necessarily the exact price.

Cost of Goods Sold

This is extremely difficult to estimate for most things. Production costs are upfront and fixed once done. A major blockbuster does not cost more due to being a major blockbuster, after the fact. The expectation of major success can increase spending, but this is not guaranteed. If a production cost $100M, then the cost of goods sold changes based on whether it makes $50M or $300M. Each production is different, and the success of one does not affect another. The same is true of television. The success of an MTV show does not determine the success of a Nickelodeon show.

For reference, when filmed entertainment did well and generated profits for the company COGS as a percentage of revenue was 17.87%. In 2015 that number was 51.76%, and in 2016 it was 53.52%. Erring on the side of caution again we chose 52% for COGS, which gives tremendous opportunity if the next few films do well.

Selling, General, and Administrative Expense

SG&A expense does not vary much from year to year. We fix ours at the high end of the small range at 23% and move that up to 23.50% later in forecast due to the eventual online push the company will make.

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Revenue Growth Rates

MediaNetworks

FilmedEntertainment

Total RevenueGrowth

Source of Historical Data: Viacom 10-k 2016, 2015, 2014

Other

There are no significant CapEx assumptions, nor other major cost assumptions. We keep the same debt structure anticipating that the recent missteps will push reducing debt off into the future. We do not project any buybacks beyond the $4.9B currently left on their authorization.9

Continuing Growth Assumptions

We assume that the company continues growing at 1%, which is below expected inflation. This is due to increased competition since barriers to entry are even lower on the Internet. Then there is the long-term decline in television. The cautiousness of the assumption also gives strength to the buy recommendation.

Alternative Valuation

Relative PE gives a valuation of $51.42 and the dividend discount model gives a price of $43.94. You can adjust these for the class B shares, the recent year has seen a premium of over $4 for the class A shares over the B. However, historically this premium has shrunk down to $1 or $2 or disappeared altogether.

Since the largest shareholder controls 80% of the voting shares there is no reason to give those shares a premium. Even owning all of them would not give significant power to affect the direction of the company. Both valuation methods confirm the buy rating. This can change to a hold with upside depending on the premium knocked off for nonvoting shares, but if there is upside after all that it makes the recommendation a safe one.

Implied Value: Relative P/E (EPS17) $ 51.42 Relative P/E (EPS18) $ 61.02 PEG Ratio (EPS17) $ 20.50 PEG Ratio (EPS18) $ 24.38

Data for Estimates: FactSet

For Verizon, the DCF or the dividend discount model can be used. The issue with the dividend discount model is the same as the one with the relative PE. There is too much reliance on the calculated EPS numbers in the model. Compared to analysts, the model’s EPS numbers are far lower, despite having higher revenues. Relative PE has a problem with outliers like US Cellular with a 2016 PE estimate of 76.6. Compared to AT&T, similar size and

business, and Comcast, similar size, Verizon is more fairly valued in relative terms.

KEYS TO MONITOR

An eye needs to be kept on media network revenue. Significant declines would change the recommendation. A decline is factored into the recommendation, but not very fast decline. Also, if Viacom does not come up with an online strategy or platform it would endanger its viability in the future and the recommendation would change.

More missteps in filmed entertainment would bring into question the effectiveness of management even if they were not enough to really change the model. There is also the issue of family control. If more personality issues affect the business it might be better to sit out Viacom.

The details of the CBS merger will also be important going forward. If CBS acquires Viacom and there is a solid premium it might be worth selling the stock to take the benefit. Viacom and CBS are struggling with the changes in their industry so it might be better to avoid them for now.

REFERENCES

1. Viacom Brands - http://www.viacom.com/brands/pages/default.aspx

2. Viacom Affiliate Fees - http://www.wikinvest.com/stock/Viacom_(VIA)/Affiliate_Fees

3. Traditional TV just got bashed by an influential expert - Business Insider - http://www.businessinsider.com/traditional-tv-is-in-decline-2015-8

4. Viacom Is a Buy: It's Cheap and The Market Misunderstands Its Business - SeekingAlpha - http://seekingalpha.com/article/4007614-viacom-buy-cheap-market-misunderstands-business

5. 4Q2016 Earnings Call Transcript - SeekingAlpha - http://seekingalpha.com/article/4021668-viacoms-viab-ceo-tom-dooley-q4-2016-results-earnings-call-transcript

6. GOLDEN CYCLE, LLC V. ALLEN, 16301 (DEL.CH. 1998) - Case Text - https://casetext.com/case/golden-cycle-llc-v-allen

7. Viacom CEO paid more than you think: Expert - CNBC - http://www.cnbc.com/2016/02/09/viacom-ceo-paid-more-than-you-think-expert.html

8. 2016 Entertainment & Media Industry Trends - PwC - http://www.strategyand.pwc.com/perspectives/2016-entertainment-media-industry-trends

9. Viacom 2016 10-k - http://ir.viacom.com/secfiling.cfm?filingID=1339947-16-110&CIK=1339947

10. ‘Monster Trucks’ Drove Viacom’s $115M Charge Even Before Its Release – Deadline Hollywood - http://deadline.com/2016/09/monster-trucks-drove-viacom-115m-charge-before-release-1201824353/

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

Viacom IncRevenue Decomposition

Fiscal Years Ending Sept. 30 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Media Networks 9,656 10,171 10,490 9,942 10,041.42 10,141.83 10,217.90 10,294.53 10,346.00 Filmed Entertainment 4,282 3,725 2,883 2,662 2,848.34 2,990.76 3,110.39 3,359.22 3,577.57 Eliminations -144 -113 -105 -116 - - - - - Total 13,794.00 13,783.00 13,268.00 12,488.00 12,889.76 13,132.59 13,328.29 13,653.75 13,923.57

Media Networks 5.03% 5.33% 3.14% -5.22% 1.00% 1.00% 0.75% 0.75% 0.50%Filmed Entertainment -11.16% -13.01% -22.60% -7.67% 7.00% 5.00% 4.00% 8.00% 6.50%Eliminations 13.39% -21.53% -7.08% 10.48%Total -0.67% -0.08% -3.74% -5.88% 3.22% 1.88% 1.49% 2.44% 1.98%

Media Networks 70.00% 73.79% 79.06% 79.61% 77.90% 77.23% 76.66% 75.40% 74.31%Filmed Entertainment 31.04% 27.03% 21.73% 21.32% 22.10% 22.77% 23.34% 24.60% 25.69%Eliminations -1.04% -0.82% -0.79% -0.93% 0.00% 0.00% 0.00% 0.00% 0.00%Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Viacom IncIncome Statement

Fiscal Years Ending Sept. 30 2014 2015 2016 2017 2018 2019 2020 2021Income Statement

Sales 13,783.00 13,268.00 12,488.00 12,889.76 13,132.59 13,328.29 13,653.75 13,923.57

COGS excluding D&A 2,463.00 6,868.00 6,684.00 6,702.68 6,828.95 6,930.71 7,099.95 7,240.26

Depreciation 177.00 188.00 188.00 185.02 216.56 246.71 276.85 310.72

Amortization of Intangibles 40.00 34.00 33.00 30.57 41.07 53.63 66.20 79.98

Gross Income 11,103.00 6,178.00 5,583.00 5,971.49 6,046.01 6,097.24 6,210.75 6,292.62

SG&A Expense 2,899.00 2,860.00 2,851.00 2,964.64 3,020.50 3,132.15 3,208.63 3,272.04

EBIT (Operating Income) 8,204.00 3,318.00 2,732.00 3,006.84 3,025.51 2,965.09 3,002.12 3,020.58

Nonoperating Income - Net 58.00 66.00 80.00 82.57 84.13 85.38 87.47 89.20

Interest Expense 615.00 657.00 616.00 611.23 623.23 632.43 641.54 653.95

Unusual Expense - Net 54.00 224.00 293.00 - - - -

Pretax Income 3,514.00 2,503.00 1,990.00 2,478.18 2,486.42 2,418.04 2,448.04 2,455.83

Income Taxes 1,050.00 501.00 519.00 693.89 696.20 677.05 685.45 687.63

Consolidated Net Income 2,464.00 2,002.00 1,471.00 1,784.29 1,790.22 1,740.99 1,762.59 1,768.20

Minority Interest 72.00 80.00 35.00 42.45 42.60 41.42 41.94 42.07

Net Income 2,392.00 1,922.00 1,436.00 1,741.84 1,747.62 1,699.57 1,720.65 1,726.12

Net Income available to Common 2,391.00 1,922.00 1,438.00 1,741.84 1,747.62 1,699.57 1,720.65 1,726.12

EPS 5.77 4.83 3.62 4.56 4.74 4.76 4.96 5.11

Total Shares Outstanding 414.20 398.10 397.00 381.66 368.69 356.86 346.98 337.88

Dividends per Share 1.26 1.46 1.40 1.44 1.49 1.56 1.64 1.77

Payout Ratio 21.83% 30.24% 38.65% 31.60% 31.33% 32.75% 33.02% 34.62%

Div Growth 9.57% 15.87% -4.11% 3.00% 3.00% 5.00% 5.00% 8.00%

Viacom IncBalance Sheet

Fiscal Years Ending Sept. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021EAssets

Cash & Short-Term Investments 1,000.00 506.00 379.00 (81.90) 671.62 1,471.69 2,204.58 2,286.10 Short-Term Receivables 3,066.00 2,807.00 2,712.00 2,799.25 2,851.98 2,894.48 2,965.16 3,023.76 Inventories 846.00 786.00 844.00 871.15 887.56 900.79 922.79 941.02 Other Current Assets 340.00 559.00 587.00 605.88 617.30 626.50 641.80 654.48 Total Current Assets 5,252.00 4,658.00 4,522.00 4,194.39 5,028.46 5,893.46 6,734.33 6,905.37

Net Property, Plant & Equipment 1,016.00 947.00 932.00 1,090.88 1,242.76 1,394.56 1,565.15 1,735.32Total Investments and Advances 345.00 434.00 542.00 549.10 547.38 573.87 601.42 630.24Long-Term Note Receivable 482.00 577.00 547.00 437.60 328.20 218.80 109.40 0.00Net Goodwill 11,535.00 11,456.00 11,400.00 11,400.00 11,400.00 11,400.00 11,400.00 11,400.00Net Other Intangibles 399.00 340.00 315.00 423.15 552.52 682.09 824.02 967.07Deferred Tax Assets 0.00 45.00 43.00 0.00 0.00 0.00 0.00 0.00Other Assets 4,088.00 3,760.00 4,207.00 4,342.35 4,424.15 4,490.08 4,599.72 4,690.62 Total Assets 23,117.00 22,217.00 22,508.00 22,437.46 23,523.48 24,652.87 25,834.05 26,328.62

Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 18.00 18.00 17.00 0.00 0.00 0.00 0.00 0.00Accounts Payable 475.00 506.00 453.00 467.57 476.38 483.48 495.29 505.08Other Current Liabilities 3,442.00 3,330.00 3,202.00 3,305.01 3,367.28 3,417.45 3,500.91 3,570.09 Total Current Liabilities 3,935.00 3,854.00 3,672.00 3,772.59 3,843.66 3,900.94 3,996.19 4,075.16

Long-Term Debt 12,751.00 12,267.00 11,896.00 11,820.81 12,052.76 12,230.72 12,406.97 12,646.90Employee Benefit Obligations 404.00 444.00 504.00 520.21 530.01 537.91 551.05 561.94Deferred Tax Liabilities 266.00 223.00 381.00 - - - - - Other Liabilities 1,798.00 1,611.00 1,514.00 902.28 787.96 799.70 819.23 835.41 Total Liabilities 19,154.00 18,399.00 17,967.00 17,015.90 17,214.39 17,469.26 17,773.44 18,119.42

Common Equity 9,772.00 10,017.00 10,139.00 10,808.08 11,475.59 12,187.07 12,891.61 12,891.61Retained Earnings 13,465.00 14,780.00 15,628.00 16,819.48 18,019.50 19,162.54 20,315.00 21,443.59 Cumulative Translation Adjustment/Unrealized For. Exch. Gain (106.00) (341.00) (435.00) (435.00) (435.00) (435.00) (435.00) (435.00)Unrealized Gain/Loss Marketable Securities 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 Other Appropriated Reserves (187.00) (193.00) (258.00) (258.00) (258.00) (258.00) (258.00) (258.00) Treasury Stock (19,225.00) (20,725.00) (20,798.00) (21,778.00) (22,758.00) (23,738.00) (24,718.00) (25,698.00)Total Shareholders' Equity 3,719.00 3,538.00 4,277.00 5,157.56 6,045.09 6,919.60 7,796.61 7,945.20 Accumulated Minority Interest 244.00 280.00 264.00 264.00 264.00 264.00 264.00 264.00Total Equity 3,963.00 3,818.00 4,541.00 5,421.56 6,309.09 7,183.60 8,060.61 8,209.20 Total Liabilities & Shareholders' Equity 23,117.00 22,217.00 22,508.00 22,437.46 23,523.48 24,652.87 25,834.05 26,328.62

Viacom IncHistorical Cash Flow Statement

Fiscal Years Ending Dec. 31 2008 2009 2010 2011 2012 2014 2015 2016

Net Income / Starting Line 1,251.00 1,568.00 864.00 2,109.00 2,385.00 2,464.00 2,002.00 1,471.00

Depreciation, Depletion & Amortization 405.00 391.00 222.00 271.00 236.00 217.00 222.00 221.00

Depreciation and Depletion 264.00 -- 161.00 189.00 171.00 177.00 188.00 188.00

Amortization of Intangible Assets 141.00 -- 61.00 82.00 65.00 40.00 34.00 33.00

Deferred Taxes & Investment Tax Credit 14.00 87.00 -119.00 376.00 -87.00 -290.00 -82.00 254.00

Other Funds 5,096.00 3,465.00 3,425.00 4,845.00 4,497.00 4,332.00 4,931.00 4,648.00

Funds from Operations 6,766.00 5,511.00 4,392.00 7,601.00 7,031.00 6,723.00 7,073.00 6,594.00

Changes in Working Capital -4,730.00 -4,360.00 -3,245.00 -4,957.00 -4,533.00 -4,126.00 -4,760.00 -5,223.00

Receivables 279.00 208.00 410.00 -292.00 270.00 -106.00 124.00 149.00

Inventories -4,731.00 -4,048.00 -3,251.00 -4,538.00 -4,492.00 -4,245.00 -4,826.00 -5,102.00

Accounts Payable -278.00 -520.00 -404.00 -127.00 -367.00 252.00 -9.00 -229.00

Other Assets/Liabilities 0.00 0.00 0.00 0.00 56.00 -27.00 -49.00 -41.00

Net Operating Cash Flow 2,036.00 1,151.00 1,147.00 2,644.00 2,498.00 2,597.00 2,313.00 1,371.00

Investing Activities

Capital Expenditures -288.00 -141.00 -105.00 -155.00 -154.00 -123.00 -142.00 -172.00

Net Assets from Acquisitions -225.00 0.00 0.00 -- 0.00 0.00 -- --

Sale of Fixed Assets & Businesses 0.00 0.00 0.00 -- -- -- -- --

Purchase/Sale of Investments -71.00 0.00 -63.00 0.00 0.00 -732.00 0.00 0.00

Purchase of Investments 71.00 0.00 63.00 0.00 0.00 732.00 0.00 0.00

Sale/Maturity of Investments 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Funds 13.00 -133.00 0.00 -72.00 -102.00 0.00 -115.00 -127.00

Other Uses 0.00 -133.00 0.00 -72.00 -102.00 0.00 -115.00 -127.00

Other Sources 13.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Investing Cash Flow -571.00 -274.00 -168.00 -227.00 -256.00 -855.00 -257.00 -299.00

Financing Activities

Cash Dividends Paid 0.00 0.00 -91.00 -417.00 -554.00 -541.00 -564.00 -635.00

Change in Capital Stock -1,275.00 -7.00 0.00 -2,286.00 -2,541.00 -3,356.00 -1,402.00 -89.00

Repurchase of Common & Preferred Stk. -1,275.00 -8.00 -- -2,450.00 -2,809.00 -3,529.00 -1,548.00 -100.00

Sale of Common & Preferred Stock 0.00 1.00 0.00 164.00 268.00 173.00 146.00 11.00

Change in Long-Term Debt -280.00 -1,368.00 -292.00 629.00 801.00 884.00 -410.00 -368.00

Issuance of Long-Term Debt 2,845.00 5,478.00 -- 1,405.00 2,116.00 1,484.00 990.00 0.00

Reduction in Long-Term Debt -3,125.00 -6,846.00 -292.00 -776.00 -1,315.00 -600.00 -1,400.00 -368.00

Other Funds 0.00 -13.00 -53.00 -153.00 -119.00 -87.00 -101.00 -81.00

Other Uses 0.00 -13.00 -53.00 -166.00 -156.00 -171.00 -144.00 -81.00

Other Sources 0.00 -- 0.00 13.00 37.00 84.00 43.00 0.00

Net Financing Cash Flow -1,555.00 -1,388.00 -436.00 -2,227.00 -2,413.00 -3,100.00 -2,477.00 -1,173.00

Viacom IncHistorical Cash Flow Statement

Fiscal Years Ending Sept. 30 2017E 2018E 2019E 2020E 2021EOperating ActivitiesNet Income / Starting Line 1,741.84 1,747.62 1,699.57 1,720.65 1,726.12Depreciation, Depletion & Amortization 215.60 257.63 300.34 343.05 390.70Deferred Taxes & Investment Tax Credit -338.00 0.00 0.00 0.00 0.00Other FundsReceivables -87.25 -52.74 -42.50 -70.68 -58.60Inventories -27.15 -16.41 -13.23 -22.00 -18.24Accounts Payable 14.57 8.81 7.10 11.81 9.79Other Assets/Liabilities -646.72 -135.48 -5.31 -8.83 -7.32Net Operating Cash Flow 872.89 1,809.44 1,945.97 1,974.01 2,042.46

Investing ActivitiesCapital Expenditures -482.62 -538.89 -581.71 -655.57 -703.91Acquisitions 0.00 0.00 0.00 0.00 0.00Purchase/Sale Investments 102.30 111.12 82.91 81.85 80.58Other SourcesNet Investing Cash Flow -380.32 -427.77 -498.81 -573.72 -623.33

Financing ActivitiesCash Dividends Paid -550.36 -547.60 -556.53 -568.18 -597.54Change in Capital Stock -310.92 -312.50 -268.52 -275.46 -980.00Issuance/Reduction of Debt, Net -92.19 231.94 177.96 176.26 239.93Other FundsOther UsesOther SourcesNet Financing Cash Flow -953.46 -628.15 -647.09 -667.39 -1,337.61

Net Change in Cash -460.90 753.52 800.07 732.89 81.52

Viacom IncCommon Size Income Statement

Fiscal Years Ending Sept. 30 2014 2015 2016 2017 2018 2019 2020 2021Income Statement

Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%COGS excluding D&A 17.87% 51.76% 53.52% 52.00% 52.00% 52.00% 52.00% 52.00%Depreciation 1.28% 1.42% 1.51% 1.44% 1.65% 1.85% 2.03% 2.23%Amortization of Intangibles 0.29% 0.26% 0.26% 0.24% 0.31% 0.40% 0.48% 0.57%Gross Income 80.56% 46.56% 44.71% 46.33% 46.04% 45.75% 45.49% 45.19%SG&A Expense 21.03% 21.56% 22.83% 23.00% 23.00% 23.50% 23.50% 23.50%EBIT (Operating Income) 59.52% 25.01% 21.88% 23.33% 23.04% 22.25% 21.99% 21.69%Nonoperating Income - Net 0.42% 0.50% 0.64% 0.64% 0.64% 0.64% 0.64% 0.64%Interest Expense 4.46% 4.95% 4.93% 4.74% 4.75% 4.75% 4.70% 4.70%Unusual Expense - Net 0.39% 1.69% 2.35% 0.00% 0.00% 0.00% 0.00% 0.00%Pretax Income 25.50% 18.86% 15.94% 19.23% 18.93% 18.14% 17.93% 17.64%Income Taxes 7.62% 3.78% 4.16% 5.38% 5.30% 5.08% 5.02% 4.94%Consolidated Net Income 17.88% 15.09% 11.78% 13.84% 13.63% 13.06% 12.91% 12.70%Minority Interest 0.52% 0.60% 0.28% 0.33% 0.32% 0.31% 0.31% 0.30%Net Income 17.35% 14.49% 11.50% 13.51% 13.31% 12.75% 12.60% 12.40%Net Income available to Common 17.35% 14.49% 11.52% 13.51% 13.31% 12.75% 12.60% 12.40%

Viacom IncBalance Sheet

Fiscal Years Ending Sept. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021EAssets

Cash & Short-Term Investments 7.26% 3.81% 3.03% -0.64% 5.11% 11.04% 16.15% 16.42%Short-Term Receivables 22.24% 21.16% 21.72% 21.72% 21.72% 21.72% 21.72% 21.72%Inventories 6.14% 5.92% 6.76% 6.76% 6.76% 6.76% 6.76% 6.76%Other Current Assets 2.47% 4.21% 4.70% 4.70% 4.70% 4.70% 4.70% 4.70%Total Current Assets 38.10% 35.11% 36.21% 32.54% 38.29% 44.22% 49.32% 49.59%

Net Property, Plant & Equipment 7.37% 7.14% 7.46% 8.46% 9.46% 10.46% 11.46% 12.46%Total Investments and Advances 2.50% 3.27% 4.34% 4.26% 4.17% 4.31% 4.40% 4.53%Long-Term Note Receivable 3.50% 4.35% 4.38% 3.39% 2.50% 1.64% 0.80% 0.00%Net Goodwill 83.69% 86.34% 91.29% 88.44% 86.81% 85.53% 83.49% 81.88%Net Other Intangibles 2.89% 2.56% 2.52% 3.28% 4.21% 5.12% 6.04% 6.95%Other Assets 29.66% 28.34% 33.69% 33.69% 33.69% 33.69% 33.69% 33.69%Total Assets 167.72% 167.45% 180.24% 174.07% 179.12% 184.97% 189.21% 189.09%

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 0.13% 0.14% 0.14% 0.00% 0.00% 0.00% 0.00% 0.00%Accounts Payable 3.45% 3.81% 3.63% 3.63% 3.63% 3.63% 3.63% 3.63%Other Current Liabilities 24.97% 25.10% 25.64% 25.64% 25.64% 25.64% 25.64% 25.64%Total Current Liabilities 28.55% 29.05% 29.40% 29.27% 29.27% 29.27% 29.27% 29.27%

Long-Term Debt 92.51% 92.46% 95.26% 91.71% 91.78% 91.77% 90.87% 90.83%Employee Benefit Obligations 2.93% 3.35% 4.04% 4.04% 4.04% 4.04% 4.04% 4.04%Deferred Tax Liabilities 1.93% 1.68% 3.05% 0.00% 0.00% 0.00% 0.00% 0.00%Other Liabilities 13.05% 12.14% 12.12% 7.00% 6.00% 6.00% 6.00% 6.00%Total Liabilities 138.97% 138.67% 143.87% 132.01% 131.08% 131.07% 130.17% 130.13%

Common Equity 70.90% 75.50% 81.19% 83.85% 87.38% 91.44% 94.42% 92.59%Retained Earnings 97.69% 111.40% 125.14% 130.49% 137.21% 143.77% 148.79% 154.01%Cumulative Translation Adjustment/Unrealized For. Exch. Gain -0.77% -2.57% -3.48% -3.37% -3.31% -3.26% -3.19% -3.12%Unrealized Gain/Loss Marketable Securities 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%Other Appropriated Reserves -1.36% -1.45% -2.07% -2.00% -1.96% -1.94% -1.89% -1.85%Treasury Stock -139.48% -156.20% -166.54% -168.96% -173.29% -178.10% -181.03% -184.56%Total Shareholders' Equity 26.98% 26.67% 34.25% 40.01% 46.03% 51.92% 57.10% 57.06%Accumulated Minority Interest 1.77% 2.11% 2.11% 2.05% 2.01% 1.98% 1.93% 1.90%Total Equity 28.75% 28.78% 36.36% 42.06% 48.04% 53.90% 59.04% 58.96%Total Liabilities & Shareholders' Equity 167.72% 167.45% 180.24% 174.07% 179.12% 184.97% 189.21% 189.09%

Viacom IncValue Driver Estimation

Fiscal Years Ending Sept. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021ESales 13,783.00 13,268.00 12,488.00 12,889.76 13,132.59 13,328.29 13,653.75 13,923.57 COGS excluding D&A 2,463.00 6,868.00 6,684.00 6,702.68 6,828.95 6,930.71 7,099.95 7,240.26 Depreciation 177.00 188.00 188.00 185.02 216.56 246.71 276.85 310.72 Amortization of Intangibles 40.00 34.00 33.00 30.57 41.07 53.63 66.20 79.98 SG&A 2,899.00 2,860.00 2,851.00 2,964.64 3,020.50 3,132.15 3,208.63 3,272.04 +PV of Interest on Op Leases 64.80 68.77 71.63 67.51 69.68 70.99 72.05 73.81 EBITA 8,268.80 3,386.77 2,803.63 3,074.35 3,095.20 3,036.08 3,074.17 3,094.39

106.95% -59.04% -17.22% 9.66% 0.68% -1.91% 1.25% 0.66%

Pre Tax Income 3,514.00 2,503.00 1,990.00 2,478.18 2,486.42 2,418.04 2,448.04 2,455.83 Total Income Tax Provision (inc. tax) 1,050.00 501.00 519.00 693.89 696.20 677.05 685.45 687.63 Tax Rate = Pre Tax/Total Inc. Provision. 29.88% 20.02% 26.08% 28.00% 28.00% 28.00% 28.00% 28.00%Plus Tax Shield on Interest Expense 183.76 131.50 160.66 171.15 174.50 177.08 179.63 183.11 Plus Tax on Lease Interest 19.36 13.77 18.68 18.90 19.51 19.88 20.17 20.67 Plus Tax Shield on Amortized Goodwill 16.14 44.84 76.42 - - - - - Minus Tax on Non-Operating Income (Plus in this formula) (Nonop Int. Income+Other Inc)

17.33 13.21 20.86 23.12 23.56 23.91 24.49 24.98

Less Adjusted Taxes 1,251.93 677.90 753.89 860.82 866.65 850.10 860.77 866.43 Plus Change in Deferred Taxes (383.00) (43.00) 158.00 (381.00) - - - - Equals NOPLAT 6,633.86 2,665.88 2,207.74 1,832.54 2,228.54 2,185.98 2,213.40 2,227.96 NOPLAT Growth % 149.81% -59.81% -17.19% -17.00% 21.61% -1.91% 1.25% 0.66%

Normal Cash (2% * Sales) 275.66 265.36 249.76 257.80 262.65 266.57 273.08 278.47 Short-Term Receivables 3,066.00 2,807.00 2,712.00 2,799.25 2,851.98 2,894.48 2,965.16 3,023.76 Inventory 846.00 786.00 844.00 871.15 887.56 900.79 922.79 941.02 Other Current Assets 340.00 559.00 587.00 605.88 617.30 626.50 641.80 654.48 Operating Current Assets 4,527.66 4,417.36 4,392.76 4,534.08 4,619.50 4,688.34 4,802.82 4,897.73 Accounts Payable 475.00 506.00 453.00 467.57 476.38 483.48 495.29 505.08 Non Interest-Bearing Current Liabilities 741.00 729.00 834.00 467.57 476.38 483.48 495.29 505.08 Net Operating Working Capital 3,786.66 3,688.36 3,558.76 4,066.51 4,143.12 4,204.86 4,307.54 4,392.66 Plus Net PPE 1,016.00 947.00 932.00 1,090.88 1,242.76 1,394.56 1,565.15 1,735.32 PV of Operating Leases 1,343.20 1,399.08 1,318.56 1,360.98 1,386.62 1,407.28 1,441.65 1,470.13 Net Other Intangibles 399.00 340.00 315.00 423.15 552.52 682.09 824.02 967.07 Other Assets 4,088.00 3,760.00 4,207.00 4,342.35 4,424.15 4,490.08 4,599.72 4,690.62 Plus Net Other Operating Assets 5,830.20 5,499.08 5,840.56 6,126.47 6,363.29 6,579.45 6,865.39 7,127.83 Less other Liab. (BS line items) 3,442.00 3,330.00 3,202.00 3,305.01 3,367.28 3,417.45 3,500.91 3,570.09 Invested Capital 7,190.86 6,804.44 7,129.32 7,978.85 8,381.89 8,761.42 9,237.17 9,685.72

WACC 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%

NOPLAT 6,633.86 2,665.88 2,207.74 1,832.54 2,228.54 2,185.98 2,213.40 2,227.96 Beg Invested Capital 6,776.42 7,190.86 6,804.44 7,129.32 7,978.85 8,381.89 8,761.42 9,237.17 End Invested Capital 7,190.86 6,804.44 7,129.32 7,978.85 8,381.89 8,761.42 9,237.17 9,685.72 ROIC (NOPLAT/Beg IC) 97.90% 37.07% 32.45% 25.70% 27.93% 26.08% 25.26% 24.12%FCF (NOPLAT - Change in IC) 6,219.43 3,052.29 1,882.87 983.01 1,825.50 1,806.46 1,737.65 1,779.42 EP (Beg IC * (ROIC-WACC)) 6,159.69 2,162.70 1,731.61 1,333.67 1,670.23 1,599.47 1,600.33 1,581.60

Viacom IncWeighted Average Cost of Capital (WACC) Estimation

2016Risk Free Rate (30yr T-Bond as of 9/9/16) 3.01%Market Risk Premium (Henry Fund Team Choice) 5.00%Beta (Bloomberg) 1.400 Cost of Equity (Risk Free + (Beta * Mkt Risk) 10.01%Cost of Debt (From Bond Maturity: 08/21/2046) 5.12%Cost of Preferred Shares 0Marginal Tax Rate (Effective) 28.00%

Total Shares Outstanding 397.00 Price $37.77Mkt Value of Equity ( E ) 14,994.69$ FMV of Debt 11,820.81$ Operating Leases (PV) 1,318.56$ Underfunded Pension Liabilities 504.00$ Mkt Value of Debt ( D ) 13,643$ Mkt Value of Preferred (Pfd) -$

Mkt Value of Firm (E+D+PfD) (V) 28,638.06$

Equity Portion of WACC (Cost of Equity * E/V) 5.24%Debt Portion of WACC (cost of Debt* (1-t) * D/V) 1.76%Preferred Portion of WACC (Cost of Preferred * Pfd/V) -$ WACC 7.00%

Viacom IncDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV NOPLAT Growth 1.00% Beg IC 2017 7,129.32 CV ROIC 24.12% Shares Outstanding 381.66 WACC 7.00% Cost of Equity 10.01%

Fiscal Years Ending Sept. 30 2017E 2018E 2019E 2020E 2021E CV (End of 2021/Beg 2022)

DCF ModelNOPLAT 1,832.54 2,228.54 2,185.98 2,213.40 2,227.96 Beg IC 7,129.32 7,978.85 8,381.89 8,761.42 9,237.17 End IC 7,978.85 8,381.89 8,761.42 9,237.17 9,685.72 ROIC 25.70% 27.93% 26.08% 25.26% 24.12%

DCF CV (NOPLAT*(1- g/ROIC)/(WACC-g)) 35,608.65 FCF (NOPLAT - Change in IC) 983.01 1,825.50 1,806.46 1,737.65 1,779.42 PV of FCF 918.72 1,594.54 1,474.72 1,325.77 1,268.85 25,391.57

V of Oper (Sum of PV of FCF) 31,974.17 Cash (81.90) Normal Cash (Sales * Normal Cash %) (2%) 257.80 Excess Cash (Cash-Normal Cash) - Minority Interests (- V of Other) (264.00) Long Term Investments 986.70 V of Non-Oper 722.70 -V of Debt = FMV of Debt (From WACC sheet) 13,643.37 -PV of ESOP 113.39 V of Equity 18,940.10$ Shares Outstanding 381.66 Target Price (V of Equity/Shares) 49.63$ To Today's Value 52.68$

EP ModelNOPLAT 1,832.54 2,228.54 2,185.98 2,213.40 2,227.96 Beg IC 7,129.32 7,978.85 8,381.89 8,761.42 9,237.17 End IC 7,978.85 8,381.89 8,761.42 9,237.17 9,685.72 ROIC 25.70% 27.93% 26.08% 25.26% 24.12%

EP CV 26,371.48 EP (Beg IC * (ROIC-WACC)) 1,333.67 1,670.23 1,599.47 1,600.33 1,581.60 Discounted EP 1,246.45 1,458.91 1,305.74 1,221.00 1,127.80 18,485.13

V of Oper (Beg IC 2015 + Sum of PV of EP) 31,974.35 V of Non-Oper 722.70 -V of Debt = FMV of Debt (From WACC sheet) 13,643.37 -PV of ESOP 113.39 V of Equity 18,940.29$ Shares Outstanding 381.66 Target Price (V of Equity/Shares) 49.63$ To Today's Value 52.68$

Viacom IncDividend Discount Model (DDM) or Fundamental P/E Valuation Model

1 2 3 4 5Fiscal Years Ending Sept. 30 2017E 2018E 2019E 2020E 2021E

EPS 4.56$ 4.74$ 4.76$ 4.96$ 5.11$

Key AssumptionsGrowth -24.97% 26.00% 3.86% 0.47% 4.12%CV Growth 1.00%ROE 32.13% 27.70% 23.66% 21.35% 21.03%Cost of Equity 10.01% 10.01% 10.01% 10.01% 10.01%

Future Cash FlowsP/E Multiple (CV Year) 13.66 EPS (CV Year) 5.11$ Future Stock Price 56.70$ Dividends Per Share 1.44$ 1.49$ 1.56$ 1.64$ 1.77$

Discounted Cash Flows 1.31$ 1.23$ 1.17$ 1.12$ 36.29$

Intrinsic Value 41.12$

To Today's Price 43.64$

Viacom IncRelative Valuation ModelsDirect Competitors

EPS EPS Est. 5yrTicker Company Price 2017E 2018E P/E 17 EPS gr. PEG 17 PEG 18DIS Walt Disney Co $98.24 $5.97 $6.70 16.5 9.6 1.71 1.53 TWX Time Warner Inc $91.35 $5.78 $5.93 15.8 14.0 1.13 1.10 DISCA Discovery Communications Inc $27.50 $2.07 $2.30 13.3 14.1 0.94 0.85 SNI Scripps Networks Interactive Inc $69.65 $5.26 $5.31 13.2 9.0 1.47 1.46 FOXA Twenty-First Century Fox Inc $27.82 $1.91 $2.11 14.6 9.8 1.49 1.35

Average 14.2 1.3 1.2

VIA Viacom Inc $42.05 3.62 4.56 11.6 4.4 2.6 2.1

Implied Value: Relative P/E (EPS17) $ 51.52 Relative P/E (EPS18) 61.23$ PEG Ratio (EPS17) 20.24$ PEG Ratio (EPS18) 24.09$

Viacom IncKey Management Ratios

Fiscal Years Ending Sept. 30 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Liquidity RatiosCurrent Ratio = Current Assets/Current Liabilities 1.77 1.33 1.21 1.23 1.11 1.31 1.51 1.69 Current Ratio ex Cash = Curr Assets ex Cash/Curr Liab 1.14 1.08 1.08 1.13 1.13 1.13 1.13 1.13 Quick Ratio = (Cash+Marketable Securities+Accounts Receivables)/Current Liabilities 1.57 1.12 1.00 1.00 0.88 1.08 1.28 1.45 Quick Ratio ex Cash 0.94 0.87 0.87 0.90 0.90 0.90 0.90 0.90 Operating Cash Flow Ratio = Cash Flow From Operations/Current Liabilities 0.52 0.30 0.31 0.23 0.47 0.50 0.49

Activity or Asset-Management RatiosTotal Assets Turnover = Sales/Total Assets 0.58 0.60 0.60 0.55 0.57 0.56 0.54 0.53 Total Assets Turnover ex Cash 0.64 0.62 0.61 0.56 0.57 0.57 0.57 0.58 Inventory Turnover 8.83 2.91 8.74 7.92 7.69 7.69 7.69 7.69

Financial Leverage RatiosDebt Ratio = Total Liab/Total Assets 77.38% 82.86% 82.81% 79.82% 75.84% 73.18% 70.86% 68.80%Debt Ratio ex Cash 86.06% 86.60% 84.75% 81.19% 75.56% 75.33% 75.36% 75.22%Equity Ratio = Total Equity/Total Assets 21.79% 16.09% 15.92% 19.00% 22.99% 25.70% 28.07% 30.18%Equity Ratio ex Cash 24.24% 16.82% 16.30% 19.33% 22.90% 26.45% 29.85% 33.00%

Profitability RatiosGross Margin Ratio= (Sales-COGS-SG&A)/Sales 61.10% 61.10% 26.68% 23.65% 25.00% 25.00% 24.50% 24.50%Profit Margin Ratio = Net Income/Sales 17.35% 17.35% 14.49% 11.50% 13.51% 13.31% 12.75% 12.60%ROA = Net Income/Avg Total Assets 10.21% 10.19% 8.48% 6.42% 7.75% 7.60% 7.06% 6.82%ROE= Net Income/Shareholder Equity 46.06% 64.32% 54.32% 33.57% 33.77% 28.91% 24.56% 22.07%

Payout Policy RatiosDividend Payout Ratio 23.06% 22.62% 29.34% 44.22% 31.60% 31.33% 32.75% 33.02%Payout Ratio = Div+Repurchase/Net Income 222.48% 164.76% 107.39% 49.30% 56.26% 56.08% 57.66% 56.96%

Viacom IncSensitivity Analysis

DCF Target Price 52.68$ As of 2016-11-18

1.000 1.100 1.200 1.300 1.400 1.500 1.600 1.700 1.800 4.12% 4.37% 4.62% 4.87% 5.12% 5.37% 5.62% 5.87% 6.12%2.21% 82.01 75.47 69.61 64.32 59.52 55.14 51.13 47.45 44.05 38.00% 57.85 56.53 55.26 54.02 52.82 51.66 50.52 49.42 48.35 2.41% 79.30 73.05 67.42 62.34 57.71 53.49 49.62 46.06 42.76 39.00% 57.82 56.50 55.23 53.99 52.79 51.62 50.48 49.38 48.31 2.61% 76.71 70.73 65.33 60.43 55.97 51.90 48.15 44.70 41.51 40.00% 57.79 56.47 55.19 53.95 52.75 51.58 50.45 49.34 48.27 2.81% 74.24 68.50 63.31 58.60 54.30 50.36 46.74 43.39 40.30 41.00% 57.76 56.44 55.16 53.92 52.71 51.54 50.41 49.30 48.23 3.01% 71.86 66.35 61.37 56.83 52.68 48.87 45.36 42.12 39.12 42.00% 57.73 56.41 55.13 53.88 52.68 51.51 50.37 49.26 48.18

3.21% 69.59 64.30 59.49 55.12 51.11 47.43 44.03 40.89 37.97 43.00% 57.70 56.37 55.09 53.85 52.64 51.47 50.33 49.22 48.14 3.41% 67.40 62.32 57.69 53.47 49.60 46.03 42.74 39.69 36.86 44.00% 57.67 56.34 55.06 53.81 52.60 51.43 50.29 49.18 48.10 3.61% 65.30 60.41 55.95 51.88 48.13 44.68 41.49 38.53 35.78 45.00% 57.63 56.31 55.02 53.78 52.57 51.39 50.25 49.14 48.06 3.81% 63.29 58.57 54.28 50.34 46.72 43.37 40.28 37.40 34.72 46.00% 57.60 56.28 54.99 53.74 52.53 51.35 50.21 49.10 48.02

24.00% 25.00% 26.00% 27.00% 28.00% 29.00% 30.00% 31.00% 32.00% 2.72% 2.92% 3.12% 3.32% 3.52% 3.72% 3.92% 4.12% 4.32%4.00% 69.55 68.50 67.45 66.39 65.32 64.24 63.15 62.05 60.94 0.60% 49.41 49.41 49.41 49.41 49.41 49.41 49.41 49.41 49.41 4.25% 66.00 64.98 63.94 62.90 61.84 60.78 59.71 58.63 57.54 0.70% 50.19 50.19 50.19 50.19 50.19 50.19 50.19 50.19 50.19 4.50% 62.68 61.67 60.65 59.63 58.59 57.55 56.50 55.43 54.36 0.80% 50.99 50.99 50.99 50.99 50.99 50.99 50.99 50.99 50.99 4.75% 59.57 58.57 57.57 56.56 55.54 54.52 53.48 52.44 51.39 0.90% 51.82 51.82 51.82 51.82 51.82 51.82 51.82 51.82 51.82 5.00% 56.63 55.66 54.67 53.68 52.68 51.67 50.65 49.63 48.60 1.00% 52.68 52.68 52.68 52.68 52.68 52.68 52.68 52.68 52.68 5.25% 53.87 52.91 51.94 50.96 49.98 48.99 47.99 46.99 45.97 1.10% 53.56 53.56 53.56 53.56 53.56 53.56 53.56 53.56 53.56 5.50% 51.26 50.31 49.36 48.40 47.43 46.46 45.48 44.49 43.50 1.20% 54.48 54.48 54.48 54.48 54.48 54.48 54.48 54.48 54.48 5.75% 48.79 47.86 46.92 45.98 45.03 44.07 43.11 42.14 41.16 1.30% 55.43 55.43 55.43 55.43 55.43 55.43 55.43 55.43 55.43 6.00% 46.45 45.54 44.61 43.69 42.75 41.81 40.86 39.91 38.95 1.40% 56.41 56.41 56.41 56.41 56.41 56.41 56.41 56.41 56.41

0.44 0.46 0.48 0.50 0.52 0.54 0.56 0.58 0.60 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00%21.00% 90.48 81.16 71.83 62.50 53.62 44.80 35.97 27.15 18.33 1.00% 39.97 40.83 41.74 42.69 43.70 44.77 45.90 47.10 48.37 21.50% 90.12 80.80 71.47 62.21 53.38 44.56 35.74 26.92 18.09 1.25% 39.95 40.81 41.72 42.68 43.69 44.76 45.89 47.08 48.36 22.00% 89.76 80.44 71.11 61.97 53.15 44.33 35.50 26.68 17.86 1.50% 39.94 40.80 41.71 42.66 43.67 44.74 45.87 47.07 48.34 22.50% 89.40 80.07 70.75 61.74 52.91 44.09 35.27 26.44 17.62 1.75% 39.93 40.79 41.69 42.65 43.66 44.73 45.85 47.05 48.32 23.00% 89.04 79.71 70.39 61.50 52.68 43.85 35.03 26.21 17.39 2.00% 39.91 40.77 41.68 42.64 43.64 44.71 45.84 47.04 48.31 23.50% 88.68 79.35 70.09 61.26 52.44 43.62 34.80 25.97 17.15 2.25% 39.90 40.76 41.67 42.62 43.63 44.70 45.82 47.02 48.29 24.00% 88.32 78.99 69.85 61.03 52.21 43.38 34.56 25.74 16.92 2.50% 39.89 40.75 41.65 42.61 43.61 44.68 45.81 47.00 48.27 24.50% 87.95 78.63 69.62 60.79 51.97 43.15 34.33 25.50 16.68 2.75% 39.87 40.73 41.64 42.59 43.60 44.66 45.79 46.99 48.26 25.00% 87.59 78.27 69.38 60.56 51.74 42.91 34.09 25.27 16.44 3.00% 39.86 40.72 41.62 42.58 43.58 44.65 45.78 46.97 48.24

43.64$ As of 2016-11-18

DDM Target Price

NOPLAT CV

Growth

SG&A/Rev

Pre-Tax Cost of Debt

Normal Cash %

Beta

COGS/REV

Risk Free Rate

Tax Rate

Market Risk Rate

Net Intagibles/Revenue

CV EPS Growth

Normal Cash %

nihar patel - viacom report

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