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February 02, 2006

E.W. Scripps Earnings Preview

E.W. Scripps (SSP) reports before the open on Thursday. The company preannounced a shortfall late last year related primarily to continuing disappointing results at the Shop At Home division. Therefore, there should be little surprise in the headline EPS number which is projected at 49 cents for 4Q05. That would bring the year in at $1.85. Revenues for the quarter are projected at $698 million.

Looking ahead, current 1Q06 consensus calls for revenue and EPS of $687 million and 44 cents, respectively. For all of 2006, EPS are projected at $2.13, up 15%, on revenues of $2.88 billion.

I have always admired SSP and was long the stock for along time. Over the past year though, I've become a little frustrated with the shortfalls at Shop At Home and investment spending that is holding back earnings growth. However, what really concerns me is a potential slowdown in the growth rate of the company's Cable Networks. SSP has created immense value in this business, which now represents over half of the EBITDA, and arguably 75% or more of the equity value. Management deserves great credit for what has been mostly internal growth and also for making additional investments to sustain the growth....

That said, I fear a slowdown in this business for three reasons. First, subscriber is slowing dramatically at HGTV and Food Network, the two networks with the highest advertising and subscriber fees. The slowdown is because both networks are no on virtually every cable and satellite system. This will eventually slow the rate of growth of revenue. Some evidence of this is already in place. In 1Q04, revenue in this division rose 36%, in 1Q05 growth was 28%, while in the quarter to be reported growth is forecast at 20%. The company is gaining with Fine Living, DIY, and Great American Country but none of these command affiliate fees or advertising rates anywhere near HGTV and Food and I fear the growth in the emerging networks might not be enough to prevent unexpectedly rapid slowing in the division as a whole.

I could easily be wrong and 20% growth, heck 15% or even 12% is still damn good. But with the division producing almost $500 million in EBITDA next year, any slowdown that leads to a multiple contraction will really restrict the upside. Each multiple point of 2006 cable networks cash flow is worth about $3 per SSP share. So if growth slows and investors decide to pay 12 times, instead of 13-14, the upside in the stock is negligible.

One business owned by SSP that could make up the difference is Shopzilla, an online comparison shopping service. Purchased by SSP less than a year ago for $525 million, Shopzilla has surprised to the upside in a big way so far. Analysts appear to be looking for about $50 million in 2006 EBITDA. Based on recent results and a likely big 4Q, I think that figure could prove way too low. If so, you could add quite a bit of value to SSP shares. Shopzilla might be worth 15 times EBITDA implied in SSP valuation. At a minimum, the company got an unbelievable deal at $525 million. Potentially, if EBITDA were to come in 2006 at say $80 million, you could add over $500 million in incremental value to SSP, north of $3.

I am on the sidelines on SSP pending gaining comfort with the Networks growth rate. I hope I can get more positive and I would point investors concerned about traditional media to SSP to see what a focused and smart management team can do to maintain above average growth.

Posted by Steve Birenberg at February 2, 2006 11:11 AM in SSP