THE STREET WEIGHS IN ON THE VIACOM/CBS SPLIT

What Everyone Is Talking About Today

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NEW YORK (AdAge.com) -- Merrill Lynch’s Jessica Reif Cohen is equally bullish on both CBS Corp. and Viacom, following Chairman Sumner Redstone’s successful splitting of his empire in two. But after five days of trading, Wall Street seems more interested at the moment in CBS Corp.

CBS, despite being seen as the slow-growth half of the kingdom, has in fact snagged more buy recommendations than Viacom, with Bloomberg totaling up 20 analysts recommending CBS, and just eight saying to buy Viacom. CBS, however, is slightly cheaper, with a target price of $36.75, while Viacom’s target price is $49.

Today Ms. Cohen issued buy recommendations on both stocks, saying of Viacom: “We project double-digit EBITDA growth will drive mid-teens or better growth in earnings per share and free cash flow/share. As domestic cable network expansion slows, we anticipate a greater share of growth will come from international operations both at the cable networks and Paramount. We also believe there is upside to Paramount's overall operations with new management and the DreamWorks SKG acquisition acting as key catalysts for the turnaround.”

The risks, she said, are that “Viacom remains heavily exposed to the advertising market. There is also significant execution risk as the company works to turn around the performance of Paramount and expands its presence in digital media. Future acquisitions could negatively impact earnings estimates and/or pose integration risk.”

As for CBS, Ms. Cohen said, “CBS is well positioned to benefit from a television market recovery in 2006 and the strong management team will deliver on its promise to improve levered returns for equity holders, in our opinion. ... We estimate 2006 will be a strong year for the Television segment (revenue up +5% and EBITDA +8%) with easier comparisons after a weak 2005” which she said suffered from tough comparisons to 2004’s presidential elections and Summer Olympics.”

Ms. Cohen was quick to note that “CBS is trading at a significant discount to its peers. We see no reason that this discount should persist given the strength of CBS's assets and greater exposure to content than its broadcasting peers.” Risks, she says, are similar to Viacom’s, revenues are tied to ad market, and shift to digital media.

So perhaps, like Ms. Cohen, the Street sees a bargain in CBS, a reliable blue-chip that will deliver returns above its competitors by plodding along its traditional path. While Viacom, as the high-flying brother, is more risky, especially if it tries to acquire its way into digital media, but has the potential to offer more rewards if it bets right. With CBS President-CEO Les Moonves insisting on acting like his company is the digital future, though, this conventional wisdom could be turned on its head.

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