In the annual Barron’s Roundtable of leading investment pros, Oscar Schafer, proprietor of O.S.S. Capital Management, sees opportunity in diversified media corporation CBS at its current level:

CBS was spun out of Viacom [VIA] earlier this month. The company has TV, radio, outdoor advertising, amusement parks and publishing. It is the cheapest large media stock, despite terrific assets, potential growth engines and a superior management team led by Les Moonves. Moonves is unique in the media business, as comfortable with the analytical side of the business as the creative side. There is a lot of opportunity to improve profitability. Moonves turned around the CBS network, making it No. 1 in primetime ratings and profitability. Now he’ll focus on news.

CBS’ news business has far lower ratings and earns much less than NBC. Sean McManus, who led the resurgences of CBS Sports, is now running the news group. CBS’ TV stations have room to expand operating margins by eight to 10 percentage points over the next few years. Moonves also is determined to grow Showtime, which was not a focus of Viacom management and is now part of CBS. Showtime has a third of the profits of HBO, so there’s plenty of room for upside. But the greatest opportunity for CBS lies in its ability to extract additional revenue streams from advertisers and other content providers. Moonves believes CBS can get paid a per-subscriber, per-month fee from cable operators to retransmit the CBS signal on their systems. If he is successful, this revenue stream will be almost pure profit. If CBS gets only 20 to 40 cents per sub, that would translate into $175 million to $350 million per year in incremental profits.

Barron’s: How likely is this?

Schafer: Some cable networks should start to pay this year. There are other opportunities to leverage CBS’ content, such as video-on-demand and Internet advertising. In March CBS will simultaneously broadcast the NCAA tournament over TV and stream it over the Internet. It will be targeting an entirely different base of advertisers for the Internet. Moonves and his team are competitive and passionate about the business. CBS will earn $1.85 a share in 2006. At less than 8.5 times 2006 Ebitda and 12.5 times after-tax free cash flow, the stock is inexpensive at $27.

CBS 1-yr chart: