« Comcast: Not Good Enough But I'd Hold On | Main | Disney Earnings Preview: Last Slow Quarter Before Growth Accelerates »

February 02, 2006

E.W. Scripps: Best Growth In Traditional Media

E.W. Scripps (SSP) shares are responding very favorably to the company's 4Q05 earnings report. I think three factors are at work. First, EPS came in above expectations at 54 cents vs. consensus of 49 cents. Second, the company announced that it is considering strategic alternatives for its home shopping business, Shop At Home. Third, Shopzilla continues to performing exceedingly well. When I consider these facts along with the company's 1Q06 guidance and general commentary, I think that the underlying value in the shares was boosted by a couple of dollars to the mid $50s. This doesn’t provide a lot of upside vs. the current stock price but it is good news.

EPS strength in 4Q05 came from good results at the Cable Networks and Shopzilla. Both were above expectations. The surprise at Cable Networks appears to be cost related as revenue growth of 21% was in line with expectations. Shopzilla performed very well across the board....

SSP provided 2004 and 2005 revenue and operating income results for Shopzilla in its press release even though it was not acquired until June 2005. If I follow the disclosures correctly, the division had 2005 EBITDA of just over $50 million. If so, that makes current analyst estimates for 2006 in the mid-$50 million range way too low. On the call, management refused to raise its guidance for Shopzilla noting that international expansion and other investments could hold back the growth. I think they are being way too cautious and that EBITDA of $60 million is a lock, maybe much higher. I am not sure what multiple to put on Shopzilla. Mid-teens seems OK as that would pay for the growth but provide a discount to Google. If so, the increased guidance adds about $1 to the underlying value of SSP shares. Arguably, momentum oriented investors interested in the internet would boost the value by even more.

I remain concerned that growth in Cable Networks could slow. 1Q06 guidance for 18-20% revenue growth would indicate further moderate deceleration. Affiliate fees grew in the low single digits in the fourth quarter, consistent with the maturity of distribution at HGTV and Food Network and the modest financial impact of subscriber growth at the emerging networks. This business is ten times the size of Shopzilla and over half of total company cash flow so any multiple contraction if the slowdown continues could cause trouble for the shares. For now, I think the risk limits upside.

Shop At Home has been the one major screw-up by SSP management team. By considering strategic alternatives and writing down goodwill, the error is being put behind them. Nevertheless, the division will still be a drag on growth until it is divested, shut down or moved into a joint venture. I think it is good news that management faced up to its mistake. It gives me more confidence in future the risk-reward tradeoff for future strategic decision-making.

Finally, Newspapers will have a tough 1Q06 with revenue forecast to rise 3-5% but expense growth up 10-13%. This will be offset financially by a boost at the Broadcast TV stations due to the Super Bowl and Olympics.

Posted by Steve Birenberg at February 2, 2006 12:10 PM in SSP