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CBS Stock Hits Highest Mark in, Ahem, 'Two and a Half' Years

Shares of CBS surged to a 2 ½-year high Friday as investors bet that a steady advertising recovery, along with web content deals, would outweigh the ratings hole left by the loss of TV’s top-rated sitcom, “Two and a Half Men”.

Cast of "Two and a Half Men"
AP
Cast of "Two and a Half Men"

CBS ended production of the sitcom’s season this week following a volatile radio interview by its star, Charlie Sheen, in which he criticized the show’s producer Chuck Lorre and made other rambling statements. Show production was halted last month after Sheen went into rehab following a reported three-day romp with porn stars.

CBS jumped above $22 a share , a closing level not hit since June 2008, after Morgan Stanley added the stock to its ‘Best Idea’ list. The shares are up more than 20 percent this year and greater than 70 percent over the last 12 months despite Sheen’s antics disrupting its biggest hit.

“Off the bottom of the economic cycle in 2009, CBS doubled earnings in 2010 and we expect earnings to double again by 2012 to $2,” said analyst Benjamin Swinburne, who placed a $27 price target on the stock, in a note to clients. “We expect CBS to continue growing EPS double digits beyond 2012 as its business model continues to transition away from more cyclical advertising sales and towards recurring and growing subscription and TV licensing fees.”

Swinburne did not address the loss of “Two and Half Men” in his note. The risks that he listed to his thesis focused on weaker-than-expected ad growth across its radio and outdoor platforms and a potential NFL lockout next season.

“Warner Brothers, not CBS owns the syndication rights to the show,” said Jon Najarian, co-founder of TradeMonster.com and a "Fast Money" trader. “CBS will not lose one dime on the loss of syndication revenue, Warner Brothers will. CBS has to fill the hole in its lineup, but just as the stock and options are telling us, the Street anticipated craziness from Charlie, much as they do for Lindsay Lohan.”

Morgan Stanley is using a conservative estimate for adverting growth in its evaluation of CBS shares. Advertising will increase by 1 percent in 2011 and CBS will repurchase $1 billion in stock, according to Swinburne’s base case. Any upside on any of those figures could drive the stock above his $27 target to as high as $34, he said.

This week, CBS announced a two-year licensing agreement with Netflix for select CBS-produced shows such as “Medium” and “Cheers”. Earlier this month, the company reported an 11 percent jump in fourth-quarter revenue, including a surprise 14 percent increase in radio advertising sales.

“Auto advertising is driving a lot of growth in TV and radio,” said Stephen Weiss of Short Hills Capital. “It’s a pure economic play.”

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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Trader disclosure: On Feb 25, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour owns (AAPL); Seymour owns (BAC); Seymour owns (F); Seymour owns (GE); Seymour owns (GM); Seymour owns (PBR); Seymour's firm owns (TTM); Seymour's firm is short (SU); Karabell owns (AAPL); Karabell owns (C); Karabell owns (FCX); Karabell owns (GE); Karabell owns (GOOG); Karabell owns (FXI); Karabell owns (RIMM); Adami Owns (AGU); Adami Owns (C); Adami Owns (GS); Adami Owns (INTC); Adami Owns (MSFT); Adami Owns (NUE); Adami Owns (BTU); Adami's wife works for (MRK); Finerman's Firm Is Short (IWM); Finerman's Firm Is Short (SPY); Finerman's Firm Is Short (MDY); Finerman's firm is short (XRT); Finerman's firm is short (IJR); Finerman's Firm Is Long S&P Puts; Finerman's Firm Is Long Russell 2000 Puts; Finerman's Firm And Finerman Own (AAPL); Finerman's Firm Owns (BAC) Leap, Finerman Owns (BAC); Finerman's Firm Owns (BBY); Finerman's Firm And Finerman Own (BP); Finerman owns (C); Finerman Owns (GOOG); Finerman's Firm And Finerman Own (HPQ); Finerman's Firm Owns (IBM); Finerman's Firm Owns (JPM), (JPM) Leap; Finerman Owns (JPM); Finerman's Firm And Finerman Own (MSFT); Finerman's Firm Owns (WMT)

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