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Merrill Analyst Plugs CBS

Merrill Lynch played up CBS' stock Wednesday, calling the media company's issue relatively underpriced in view of its advertising outlook, cash-flow growth and Internet strategy.

Media analyst Jessica Reif Cohen, putting CBS on the brokerage's influential Focus One list of recommended stocks, reiterated her 12-month price target of $50, about 33 percent over its current level.

On the news, CBS' stock initially gained on the news, but then sagged under the weight of the broader market. Shares closed 1/16 lower to 36 5/8. Shares of Infinity Broadcasting (INF), the CBS-controlled radio-station giant, dipped 7/16 to 25 1/8.

Cohen called CBS' valuation "compelling," saying it's the least expensive of the major media stocks with a multiple of 13 times anticipated pre-tax cash flow. "The CBS TV network is one of only four entities with mass reach and the ability to create blockbuster hit programming," she said. "This scarcity value will be realized sooner rather than later."

In a research note and in her conference call with the investment community, Cohen said advance bookings of advertising on the company's TV network will rise 7 to 9 percent this year, with CBS outperforming the rest of the industry. Same-station radio revenue growth is up 15 percent this year, she said.

First-quarter pre-tax cash flow, a key measure of growth for media companies, will decline by 3 percent, a rate Cohen described as a relatively low since the year-ago period included an Olympic broadcast.

Additionally, the company looks likely achieve its cost-cutting objective of $180 million this year, Cohen added.

She said CBS also is poised to unlock the value of its Internet investments by pursuing an idea that surfaced last month to offer tracking stock in its Web assets. CBS is part owner of (MKTW), the publisher of this Web site, and has a significant stake in SportsLine USA (SPLN).

"We think it'll happen this year," Cohen said of the tracking-stock idea. "Management is driven on this area. We expect CBS to create a new vehicle for aggregating assets in the high-growth Internet arena that will exploit the rapid convergence of new media and old media."

Cohen downplayed the importance of Chairman Mel Karmazin's comments last week about wanting to buy the NBC network from parent General Electric (GE).

She said Karmazin and NBC aren't talking in negotiations and no deal is expected. Rather, the CBS chief was voicing feelings that "it's a good business and if he could buy more of it, he would," she said. Instead of a deal between CBS and NBC, Cohen said a pact between a TV network and a major motion picture studio could be a possibility.

As radio giant Chancellor Media (AMFM) mulls a possible sale of itself to another radio player, CBS is hunting for radio stations that may get spun out of a deal between Chancellor and its likely suitor, Clear Channel (CCU).

Infinity will be a "redy buyer" she said, with the radio unit spending as much as $4 billion to fill out its radio station portfolio.

Written By Steve Gelsi, CBS MarketWatch