Shares of entertainment behemoth Viacom Inc. (VIAB), which has discussed merging with sister company CBS Corp. (CBS), have the potential to rise 20% whether or not it merges with the giant TV network, according to a detailed story in Barron's. With Viacom's new Chief Executive Officer (CEO) Robert Bakish at the helm, the company is doubling down on optimizing the use of its TV assets in the next generation of streaming, while securing a turnaround from a years-long string of film failures, and earning a higher value for Viacom’s beaten down shares.

According to Barron's Jack Hough, the new leader may even engineer a takeover of CBS in the wake of the departure of Les Moonves, who was abruptly forced to step down following allegations of sexual misconduct that spanned the majority of his career. 

Viacom, CBS Missed The Bull Market 

Stock 5-Year Performance
VIAB -64%
CBS -1%

Viacom Cheap Relative to Growth Opportunities

On Sunday, National Amusements (NAI), which owns a controlling stake in CBS and Viacom, indicated that it would not pursue a merger of the two companies for at least two years and will consider "any business combination transaction or other strategic alternatives that the independent directors believe are in the best interests of the Company." NAI has tried and failed twice to merge the two media companies in efforts to ramp up scale in an increasingly competitive industry, which has been filled with mega-deals such as AT&T Inc.'s (T) acquisition of Time Warner and Walt Disney Co.'s (DIS) deal with 21st Century Fox Inc. (FOXA). (For more, see also: Buy CBS on the Dip, Could Be Bought by Amazon, AT&T: B. Riley.)

Despite the announcement, now that Moonves is out, there remains a chance that the two firms will combine and be led by Bakish, wrote Hough. 

He added that Viacom's valuation is another "immediate reason" to give the stock a look. Back in August, Viacom shares surged 6% in just one day on earnings which surpassed expectations, signaling that the Street has been too bearish, wrote Barron's, forecasting better news ahead and a 20% or more share gain in 12 months. Plus, Viacom has an attractive dividend at 2.7%, wrote Hough. 

Viacom, which like its cable industry peers is struggling to hedge against the rise of lower cost options and on-demand streaming platforms led by Netflix Inc. (NFLX), has also battled with money-losing films via Paramount Pictures. Barron's expects Bakish to help revamp the business in a handful of ways, including offering more merchandise, focusing on fewer channels with more viewership, and  "double or triple-dipping more often on intellectual property." For example, the decades old cartoon Rugrats is slated to return to Nickelodean with 26 new episodes, with a movie in the making for 2020. 

Viacom's 6 Flagship Networks

Black Entertainment Television (BET)
Comedy Central
MTV
Nickelodeon
Nick Jr.
Paramount Network

Hough expects Viacom's studio division to return to profitability and growth in the year ahead, while TV is showing signs of a reboot, thanks to rising ratings for BET and Comedy Central and a new reunion season of the popular Jersey Shore. 

Meanwhile, Hough suggests that Bakish will continue to complement Viacom's TV business with new content for streaming services, a new service, improved distribution through mobile apps, and more live events. On top of the momentum within Viacom, a potential merger with CBS could unlock cross-selling and cost savings, added Hough. 

With revenue expected to gain 4% and earnings forecasted to increase 8% in the coming fiscal year, Viacom shares also look cheap at just 8 times earnings compared to 10 times for CBS, wrote Barron's. (For more, see also: Viacom Could Enter Long-Term Uptrend.)

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