One Good Idea: Buy CBS shares

Battered stock is cheap and has great potential for capital gains

By Dianne Maley
Globe Investor Magazine online, October 20, 2008

Source: Tim McElvaine, founder and president, McElvaine Investment Management Ltd., manager of the McElvaine Investment Trust.

The Idea: Buy shares of broadcasting and communications giant CBS Corp.

The shares plunged to a record low of $7.54 (U.S.) last Friday. Their collapse was made worse by the fact the company's chairman and controlling shareholder, 85-year-old Sumner Redstone, was forced by lenders to sell a fifth of his family's holdings in CBS into the seemingly bottomless stock market to meet loan covenants. CBS shares tumbled 20 per cent in a single day. A year ago the stock was trading at $30.

The sale by a key insider before the company's third-quarter financial report Oct. 30 forced CBS to hastily update its financial guidance. The company cut its profit forecast and said it would take a non-cash writedown of about $14-billion to account for the diminished value of its TV and radio stations, which have been hit hard by the advertising downturn.

The forced sale rekindled an ongoing feud between the elder Redstone and his daughter and former heir-apparent, Shari Redstone.

All in all, an ideal situation for a bargain hunter like Mr. McElvaine.

"As a value guy, I don't usually get to buy a big company that is so cheap," he said.

CBS has $40-billion in assets and is trading at a price/earnings multiple of five times. Mr. McElvaine began nibbling away at the stock last Friday and bought more on Monday, when the Canadian stock market was closed for the Thanksgiving holiday. As he sees it, CBS is in a number of different businesses that, combined, are worth at least twice what the stock is trading at.

The $1.08 dividend - which gives the stock a yield of about 12 per cent - is likely to be slashed, despite the company's reassurances last week, he says. "I'm not buying it for the dividend," Mr. McElvaine says.

The Payoff: Potentially big capital gains in three or four years.

The Big Risk: Looking past the crumbling U.S. economy, which is already factored into the stock price, the biggest risk for CBS is the unresolved succession issue, Mr. McElvaine says. The Redstones had begun discussions at one point to end their business relationship, leaving stewardship of the conglomerate in question.

An additional risk for Canadian investors that the loonie will rise against the greenback when it comes time to sell. That would erode gains in U.S. dollars.

Why listen to Tim McElvaine? Mr. McElvaine earned his credentials working with renowned value investor Peter Cundill. Except for two years, 2002 and 2004, the McElvaine fund has earned double-digit returns since its inception in 1997, and has never lost money.

Special to The Globe and Mail