The New CBS Storms Out of the Gate

The newly minted TV stock adds 3%, as Wall Street mulls over acquisition prospects.
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Weighing the relative merits of two newly minted and much-discussed stocks Tuesday, Wall Street came to a surprising conclusion: Buy 'em both.

After months of preparation, Sumner Redstone's mighty conglomerate formally split into its

CBS

(CBS) - Get Report

and

Viacom

(VIA) - Get Report

halves Tuesday. Holders of the old Viacom got half a share of each newly independent company. The split left media investors with a new question: which stock to buy?

Given its many promising properties, Tom Freston's new Viacom has been deemed the obvious choice by some hard-charging growth-oriented investors. But for one day at least, Les Moonves' cash cow CBS operation held its own.

On Tuesday, the first day of trading for the two spinoffs of the New York-based conglomerate, CBS rose 3% to $26.24, while Viacom soared 4% to $41.73.

Figuring where to place one's bet is hardly simple. On the one hand, there's Freston and his fast-growing MTV side of the business. Just last month it agreed to acquire the live-action studio Dreamworks SKG in a deal that will give it the right to distribute sibling

Dreamworks Animation's

(DWA)

beloved cartoon movies.

But investors banking on mighty Freston must consider whether they really want to bet against canny CBS chief Les Moonves. His value-oriented side of the business continues to spin off mighty amounts of cash through its TV operations, newly rebranded CBS radio and outdoor business. Moreover, rumblings in the market suggest CBS leaders have no intention of sitting around as a boring value play. If a November investment in college sports network CSTV is any indication, the company still intends to keep expanding.

Prudential, initiating coverage on the newly separated companies, pointed to Viacom's hefty multiple in leaning toward the Black Rock. The firm put an overweight rating on CBS with a $30 target and a neutral weight rating on Viacom with a $42 target.

"CBS Corporation's valuation appears compelling," writes Prudential's Kathy Styponias. "As of the when-issued's close on 12/30/05, the CBS Corp. shares are trading at approximately 8.2 times our 2006 OIBDA estimate and 7.0 times our 2007 estimate. Using pure-play multiples for CBS's businesses such as its TV and radio stations as well as its outdoor business suggests that the stock should trade closer to 9.3 times 2006 estimates and 8.8 times 2007."

On Viacom, by contrast, Styponias says that "multiple expansion will likely only come when the company soundly beats expectations." She believes one key reason the split hasn't resulted in a higher stock price is that estimates being revised downward.

At CBS, Chief Financial Officer Fred Reynolds has a well-established reputation as a conservative, shrewd fiscal manager, who will not let the company slip from its BBB credit rating. Still, Moonves wants firepower to fight battles on retransmission consent down the line and is positioning CBS Digital Media as media technology and distribution continues to explode. In other words, he wants to grow.

To help the cause along on the retransmission side, cable network Showtime now sits on the CBS side, along with College Sports Television, brought in last year at the relatively inexpensive price tag of $325 million in stock. The question is whether CBS will he go after properties like

Crown Media

(CRWN)

and its Hallmark channel.

If CBS has intentions of doing more than their stated tuck-in acquisition model looking forward, new bosses Moonves and Freston might be competing for assets as they come on the market. Of course, maybe Chairman Sumner Redstone -- who still controls both companies -- likes it best that way.