Analysis: VIAB BP XEC

After you receive this Alert, we will be initiating a position in Viacom Inc. (VIAB) , buying 800 shares at roughly $33.55. In addition, we will be buying 200 shares of BP (BP) at roughly $43.83. Lastly, we will be selling 100 shares of Cimarex (XEC) at roughly $90.84. Following the trades, VIAB, BP, and XEC will represent approximately 0.97%, 4.10%, and 0.82% of the portfolio, respectively.

During today's members-only call, we told you how we are bringing VIAB out of the bullpen and into the portfolio You can read our initial bullpen Alert on the company here. The company's third-quarter of fiscal 2018 earnings release can be found at this site.

Our bullish thesis on VIAB is mainly predicated on the turnaround of the company. From a holistic viewpoint, CEO Bob Bakish has implemented an aggressive cost-cutting strategy, helping improve the overall profitability profile. Additionally, Bakish has cited four key areas that will continue to contribute to the company's turnaround, including the Domestic Affiliate Business, Viewership in Media Networks, Ad Sales and Paramount Pictures.

In the domestic and affiliate business, Viacom has been rebuilding and expanding its relationships with distribution partners, reducing the amount of uncertainty that weighted on the company just 18 months ago. Viacom has broadened the scope of the relationship it has with partners to make advanced advertising and co-production deals (less risk), while also laying groundwork for new areas of growth in mobile-only and OTT bundles. After a period of tough revenues, management now expects domestic affiliate revenue growth of 1% in the upcoming quarter,

What Viacom has done to improve its viewership recently is fantastic. Dating back to its most recent quarter, its flagship brands have produced five straight quarters of year-over-year share growth. It's a turnaround story that no one seems to be talking about. Previously, investors thought MTV was a network in decline, but its resurgence of popular television shows made it the fastest-growing network in price across cable and broadcast in the important 18-to-34 target demo. MTV rules in unscripted cable series, which also carry lower costs per episode.

In ad sales, Bakish has cited that the foundation is in place to grow the business, and they are seeing particular strength in upfront pricing, which last quarter was the best in five years.

And at Paramount Pictures, Viacom has done wonders fixing a business that lost $500 million in earnings and used up over $1 billion in cash in 2016. Plus, they are monetizing their strong slate of IP better than ever before, and Paramount is on track to deliver well over $200 million in operating improvement for the year.

We are starting relatively small in VIAB because the stock is slightly up in today's bad tape. We are at a volatile point in the market, and we must strike a balance between capitalizing on opportunities to buys with an understanding that a we might get a better price later if a retest occurs. So we will leave ourselves with plenty of room to scale in. Lastly, we are initiating the position with a $40 price target, which reflects roughly 9 times consensus fiscal 2019 earnings. Multiple expansion will be the key to getting the stock to significantly higher prices, and we believe investors will be willing to pay up for this stock once they acknowledge how successful Bakish's turnaround strategy has been.

BP and Cimarex

After more consideration, we are moving around our energy positions, selling 100 shares of Cimarex and taking those funds and putting it directly into 200 shares of BP (our preferred energy name). Though we think Cimarex should be able to climb higher as it increases oil production, we remind members that it is landlocked in the Permian Basin, forcing the company to accept lower realized prices in oil and natural gas than the market rate.

Also, as we said on the call, everything seems to be coming together at the right time for BP. After a period of shedding assets, BP is transitioning to a period strong production growth thanks to the robust number of projects coming onstream over the next few years. These projects carry a breakeven cost well below the current price of oil, boosting its case for sustained free cash flow growth.

Further boosting the company's free cash flow profile is the rolloff of its Macondo payments. For years, BP has been hamstrung by the liability it owes related to the devastating Deepwater Horizon explosion, but those payments are finally winding down and are near their tail-end. As this overhang abates, management will be better equipped to allocate its cash toward capital returns.

We like BP's new Permian exposure and its refinery capacity, which his bountiful, and it is one of the few companies with substantial U.S. holdings that can benefit from the price of at $70 a barrel. BP's breakeven price to organic free cash flow was around $50 per barrel this year, and that will steadily reduce to around $35 to $40 per barrel by 2021.

Lastly, we would be remiss not to mention the stock sports an impressive dividend yield well above 5%, a payout that's easily covered by the company's bountiful cash flows.