Since 2014, Viacom (NYSE:VIA) has taken quite a tumble, down to a level of $46.30 at the time of writing.

However, I make the argument that on the basis of current valuation and business prospects, Viacom is one of those "unloved" stocks that at present has very little downside and a lot of upside.

**Dividend Discount Model - Sensitivity Analysis**

When looking to buy a stock for growth, a sensible investor should be looking to protect his capital by limiting the downside while gaining exposure to significant upside. In my opinion, Viacom allows for just that.

**0% growth scenario**

Dividend Per Share Forecast (2016-20) | |||||

2016E | 2017E | 2018E | 2019E | 2020E | |

Projected 10% dividend growth | 1.60 | 1.60 | 1.60 | 1.60 | 1.60 |

7% discount rate | 1.50 | 1.40 | 1.31 | 1.22 | 1.14 |

Earnings Per Share Forecast (2016-20) | |||||

2016E | 2017E | 2018E | 2019E | 2020E | |

Projected 10% earnings growth | 5.26 | 5.26 | 5.26 | 5.26 | 5.26 |

7% discount rate | 4.91 | 4.59 | 4.29 | 4.01 | 3.75 |

Terminal P/E Ratio (which is the current one) | 9.747 |

Terminal P/E * Estimated 2020 earnings (Projected price in Year 5) | 36.54 |

Present Value of Dividends Per Share Through to 2020 | 6.5603158975 |

Target Price in Year 2020 | 43.1006622378 |

Upside from price of $42.44 | 1.56% |

5-Year Annualised Rate of Return | 0.31% |

**10% growth scenario**

Dividend Per Share Forecast (2016-20) | |||||

2016E | 2017E | 2018E | 2019E | 2020E | |

Projected 10% dividend growth | 1.60 | 1.76 | 1.94 | 2.13 | 2.34 |

7% discount rate | 1.50 | 1.54 | 1.58 | 1.62 | 1.67 |

Earnings Per Share Forecast (2016-20) | |||||

2016E | 2017E | 2018E | 2019E | 2020E | |

Projected 10% earnings growth | 5.26 | 5.78 | 6.36 | 7.00 | 7.70 |

7% discount rate | 4.91 | 5.05 | 5.19 | 5.34 | 5.49 |

Terminal P/E Ratio (which is the current one) | 9.747 |

Terminal P/E * Estimated 2020 earnings (Projected price in Year 5) | 53.50 |

Present Value of Dividends Per Share Through to 2020 | 7.9078065024 |

Target Price in Year 2020 | 61.4065275793 |

Upside from price of $42.44 | 44.69% |

5-Year Annualised Rate of Return | 8.94% |

Assuming a terminal P/E ratio of 9.747 (the current P/E ratio at the time of writing), we see that assuming no growth in dividends or earnings over the next five years, we see that Viacom's 5-year target price is $43.10. On the other hand, assuming the company grows dividends and earnings by 10% per annum, we yield a target price of $61, which represents a 45% upside from the current price of $42.44.

Moreover, we see that the terminal P/E ratio of 9.7 is at a five-year historical low:

Let us assume that our terminal P/E were to reflect an average, e.g. 15:

Dividend Per Share Forecast (2016-20) | |||||

2016E | 2017E | 2018E | 2019E | 2020E | |

Projected 10% dividend growth | 1.60 | 1.76 | 1.94 | 2.13 | 2.34 |

7% discount rate | 1.50 | 1.54 | 1.58 | 1.62 | 1.67 |

Earnings Per Share Forecast (2016-20) | |||||

2016E | 2017E | 2018E | 2019E | 2020E | |

Projected 10% earnings growth | 5.26 | 5.78 | 6.36 | 7.00 | 7.70 |

7% discount rate | 4.91 | 5.05 | 5.19 | 5.34 | 5.49 |

Terminal P/E Ratio (which is the current one) | 15 |

Terminal P/E * Estimated 2020 earnings (Projected price in Year 5) | 82.33 |

Present Value of Dividends Per Share Through to 2020 | 7.9078065024 |

Target Price in Year 2020 | 90.2388638691 |

Upside from price of $42.44 | 112.63% |

5-Year Annualised Rate of Return | 22.53% |

Assuming a 10% growth in dividends and earnings, we now yield a target price of $90, which represents a 112% upside from the current price.

From the above scenarios, we see that Viacom has virtually no downside at the current P/E ratio in the event of no growth, while being exposed to significant upside should dividends and earnings continue growing.

So, the big question is, can Viacom continue growing? One of the biggest challenges the company faces is in keeping down operating expenses while bolstering revenues. For instance, taking the Media Networks segment as one example, we see that while revenues increased from 2014, the increase in expenses had ultimately led to a lower operating income:

Source: 2014 Annual Report

Indeed, Viacom does face headwinds in that the cost of entertainment production is ever-increasing while demand must remain vibrant in order to remain profitable. Nevertheless, Viacom is a globally reputable media network, and the company has been responsible for blockbuster movie titles including *Wolf of Wall Street*, *Transformers: Age of Extinction *and *Hercules*, among others, while its offerings from entertainment channels such as Nickelodeon continue to remain popular.

Moreover, should the industry come to see a sufficient recovery in spite of economic headwinds, Viacom's offerings provide the company with the economies of scale necessary to reduce production costs while increasing revenues, i.e. increased demand means that fixed costs associated with production can be spread out over a larger revenue base. Moreover, while expenses have been a concern, there is a good chance that this will reap dividends as Viacom continues to invest in media networks which will help the company increase advertising revenues on digital platforms. With the brand titles owned by the company, Viacom is still a leading player in the industry and the continued expansion into digital platforms allows the company to retain its relevance going forward and retaining a highly loyal customer base.

To conclude, I take the view that Viacom is quite a cheap stock at the current price and the company's investments in developing its digital platform capabilities will stand the company in good stead going forward.

**Disclosure:** I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.