Viacom: Cash Machine

Rumors of a power play are haunting shares of the media giant. Also featured: Sears and Asta Funding

Shares of media giant Viacom (VIA ) are depressed not by fundamentals, but by the power struggle between Chairman and Chief Executive Sumner Redstone and President and Chief Operating Officer Mel Karmazin, whose contract expires at the end of 2003. Redstone publicly says he wants Karmazin to stay, but sources close to Viacom say Redstone, who owns 68% of Class A voting stock, really wants his No. 2 out because he's getting too much credit for Viacom's upbeat performance. That has rattled investors, since many credit Karmazin for much of Viacom's success. As a result, the stock, which hit 51 last March, has fallen as low as 36.55 as of Feb. 12.

But the "stock's drop is a buying point not to be missed--whether or not Karmazin quits," says Lewis Rabinowitz, president of investment manager R. Lewis Securities, which is buying shares. "We hope Karmazin stays, but whatever the outcome, Viacom remains extremely attractive with its superior assets and strong balance sheet." He expects Karmazin's tenure will be resolved soon. With Viacom trading at a modest 14 times estimated 2003 earnings before interest, taxes, depreciation, and amortization (EBITDA), he sees the stock at 55 in 12 months.

Mario Gabelli, whose mutual funds own more than 6% of Viacom's voting shares, agrees the stock will be attractive even if Karmazin goes. "Viacom is a cash machine," he says, adding it's on the prowl to buy more assets to keep growing, targeting cable programming. Viacom's current properties include CBS, Paramount Pictures, and Infinity Broadcasting. It posted fourth-quarter earnings of 34 cents a share--2 cents better than the First Call consensus estimate--vs. a loss a year ago.

Why Sears Is in the Basement

Sears Roebuck (S ) may be in more trouble than the No. 1 department-store chain has acknowledged. "Sears' financial woes with its ailing credit-card business could be just the tip of the iceberg," says a hedge-fund manager, who refuses to be named and is short Sears' stock. Shares have fallen to 21 a share from 59.90 in June. On Feb. 6, Sears said first-quarter profit will be far less than the 87 cents-a-share consensus forecast, partly because of crimped income from its credit-card business, hurt by rising delinquencies. The unit accounts for more than 50% of total profits.

Rumors are the credit-card problems may have influenced General Counsel Anastasia Kelly to resign on Jan. 27--three months after Kevin Keleghan, who ran the credit division, was dismissed. Sears CEO Alan Lacy says Keleghan "wasn't forthcoming" with information on the card business. Keleghan has sued for breach of contract and defamation. Kelly's departure, says Lacy, was part of a corporate reshuffle. Kelly couldn't be reached for comment.

Edward Jones analyst Asma Usami suggests avoiding the stock until Sears addresses its credit-card woes and slumping sales. She worries its "aggressive and high-risk" card business worsens earnings uncertainty.

Asta Turns Red Ink into Black

During hard economic times, lots of people fall behind in their debt payments or must renege on their financial obligations. That's where little-known Asta Funding (ASFI ) comes in. Asta buys those receivables, or unpaid debts, from banks, finance companies, and other service providers. Asta pays a penny to 36 cents on the dollar, depending on its evaluation of the chances of collecting the distressed debts. Its net income rose from $8.5 million, or $2.16 a share, in fiscal 2001, to $10.3 million, or $2.38, in the year ended Sept. 30, 2002.

Herbert Hardt, a partner at investment firm Monness, Crespi, Hardt, rates Asta a strong buy and expects it to earn $2.65 in 2003. He sees the stock, now at 14, at 30 in two years based on a multiple of 12 times his 2003 profit estimate. A big rival, Portfolio Recovery Associates, trades at 20 times estimated 2003 earnings, he notes. In 2002, Asta bought $1.4 billion worth of receivables for $31 million, and Hardt expects it to spend about the same this year. Current receivables total $3.8 billion.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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