Viacom: Cash Machine

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.

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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