When Viacom (VIAB) and CBS (CBS) went their separate ways on Wall Street last year, most analysts and investors felt that the more youth-oriented Viacom - which owns MTV, Nickelodeon and the Paramount movie studio - would be the better stock than CBS and its stodgy broadcast TV, radio, billboard and book publishing divisions.

But Viacom’s stock lagged the performance of CBS and its other big media rivals News Corp. (NWS), Walt Disney (DIS) and Time Warner (TWX) in 2006. Now, however, Viacom is starting to turn the corner.

Shares of Viacom are up 6 percent so far this year. That’s less than the gains that shares of News Corp. and CBS have enjoyed this year but Viacom has outperformed Disney and Time Warner, which is the parent company of CNNMoney.com.

What’s driving the turnaround in the stock? For one, cable TV has emerged as one of the hottest mediums for advertisers this year. According to a recent report by research firm TNS Media Intelligence, ad spending on cable TV is expected to increase by nearly 6 percent this year, making cable TV the second fastest growing category, trailing only Internet display advertising.

That’s obviously good news for Viacom, which, in addition to MTV and Nickelodeon, also owns cable networks Spike, Comedy Central and BET. Nearly two-thirds of Viacom’s total sales in the first quarter of 2007 came from its media networks business. And more than half of that division’s sales came from advertising.

But Viacom isn’t benefiting just from an improved cable environment. It’s also done well at the box office this year. According to figures from movie industry research firm Box Office Mojo, Paramount is the number two studio in terms of domestic box office, with 20.1 percent of the U.S. market. The studio is just three-tenths of a percentage point behind Sony (SNE) for the top spot.

The company was the distributor for “Shrek the Third,” the animated movie produced by DreamWorks Animation (DWA), that has grossed nearly $300 million at the box office this year. Paramount owns the live action DreamWorks SKG studio and has a distribution agreement with the DreamWorks animated unit.

Paramount/DreamWorks have also had several of their own big hits this year with the Will Ferrell figure skating farce “Blades of Glory,” Eddie Murphy comedy “Norbit” and the Hitchcockian thriller “Disturbia.”

But what could really make or break Paramount’s year is the upcoming live action “Transformers” movie, due out on July 3. The special effects look amazing and the buzz is building that this could be one of the biggest hits of the summer. Will “Transformers” stand out amidst the sea of sequels? Viacom shareholders are certainly hoping so.

Finally, investors will also need to keep a close eye on what happens next in Viacom’s legal battle against Google (GOOG) and its online video subsidiary YouTube. Viacom made the bold move in March to sue Google and YouTube for copyright infringement and is seeking $1 billion in damages.

Regardless of the outcome of that case, assuming it ever goes to court, Viacom is proving that is willing to take the gloves off to fight for its intellectual property rights. And that’s going to be increasingly important as Viacom continues to tout its own digital offerings such as iFilm and Atom Entertainment as well as its investment in hot online video startup Joost.

Viacom may not yet be the sexy media growth stock that Wall Street expected it would be. But it does look like it’s finally undergoing a rewarding “transformation” for its shareholders.