Is Viacom a Survivor? Top fund manager John C. Thompson is wagering that the media giant will once again become a Wall Street darling
By Tara Kalwarski

(MONEY Magazine) – Since taking over as lead manager of Thompson Plumb Growth fund from his father in 1998, John C. Thompson has minted a sterling record. His $1.3 billion portfolio is listed in this year's MONEY 100 (see page 74) and has topped its peers over the past three, five and 10 years. Thompson's secret? Savvy bets on out-of-favor shares of growing companies. "I look for companies where the fundamentals are doing well but the stock price is not," he says. His current favorite? Viacom (VIAB), a stock the fund has held and profited from many times over the past eight years.

Why buy now?

Thompson is always on the prowl for fallen angels, and buys when a company's valuation falls below its historical range and industry average. He looks at both price-to-earnings and price-to-free-cash-flow ratios. (Free cash flow is the money left over after a firm's bills are paid and investments are made.)

The nation's second-largest media conglomerate (by market cap) fits the bill. At $37, Viacom trades at less than half of its five-year peak, and is valued at 20 times estimated 2005 earnings and 17 times projected 2005 free cash flow, low levels not seen since 2001.

Viacom's stock price is weighed down by the company's weak radio business, where sales growth has slowed. But Thompson believes that radio advertising, which rode the fortunes of the dotcom boom and bust, will start galloping as the economy improves. Viacom is also spinning off the beleaguered Blockbuster video-rental chain this fall, which will put $738 million in the company's coffers. And Thompson hopes Viacom's TV unit--which includes CBS, MTV and Nickelodeon--will get a boost from increased ad spending, due to improved ratings and this year's presidential election. More important, he figures that 2005 free cash flow will reach $2 a share, a 22% jump from 2004.

What could go wrong?

The company's CEO and controlling shareholder, Sumner Redstone, recently announced plans to relinquish his post in three years. Co-presidents Leslie Moonves and Tom Freston--presumed CEO candidates--might not have the same Wall Street clout as the 81-year-old Redstone. And what about that Blockbuster spin-off? It makes sense to get out of a business under siege from video-on-demand services and other rival offerings. But Viacom may miss the lush cash-flow stream that Blockbuster has provided.

When would he sell?

An acquisition that crimps earnings per share or dilutes his stake would lead Thompson to jettison Viacom. At what price would he be tempted to cash in? He calculates that the stock is worth about $50. He adds, "If it gets there tomorrow, I'd sell." --TARA KALWARSKI