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Undervalued Viacom?

Here’s a conundrum: SpongeBob SquarePants generates $8 billion in revenue for Viacom’s Nickelodeon, but the conglomerate’s market cap is just $12 billion. How can that be?

Well, the short answer is that Wall Street has grossly undervalued Sumner Redstone’s company, Cramer said. But he’s not sure how long this will be the case. As a matter of fact, SpongeBob will ring the New York Stock Exchange’s opening bell on Thursday in honor of his 10th anniversary, and that may be enough to spark widespread reconsideration of Viacom’s profit potential.

Now, the Street has reason to shun this company. In the three and a half years since its split with CBS, Viacom has delivered disappointment after disappointment. But the film and cable television businesses have finally seemed to turn up. Viacom-owned Paramount has already raked in $703 million from Transformers in its first three weeks, and Star Trek was a winner as well. These hits, as well as lack of competition from independent films, have boosted a profitability that has long lagged Viacom’s peers. In cable, revenue-weighted ratings have improved significantly year-over-year, and the money earned from affiliate contracts is often overlooked.

Remember, Viacom owns MTV, VH1, BET, Comedy Central, the aforementioned Nickelodeon and Paramount and other businesses. So it’s hard to reconcile with the Street’s $4 billion valuation for the non-SpongeBob related divisions. And the stock trades at just nine times 2010 earnings, which is a discount to Disney, Time Warner and similar media companies. Maybe the investor low-balling has to with Sumner Redstone’s leadership. Or maybe they don’t like the two classes of stock, used to prevent a takeover. Either way, Cramer thinks Viacom’s franchises are worth more separate than the company is as a whole.

But it will take a catalyst to make that breakup happen. A Redstone-induced catalyst, Cramer said. He pined for an earlier era, the 1980s, when the chairman made a point of stepping in if the discrepancy between Viacom’s actual worth and its market valuation were too great. But these are different times. And that doesn’t mean money can’t be made here. Just buy some shares before SpongBob gets his hands on that gavel.

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