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April 24, 2006

E.W. Scripps Earnings Preview

I am leaning more bullishly on the shares of E.W. Scripps (SSP) ahead of its 1Q06 earnings due tomorrow before the open although my recent visit with the company at Prudential's Midwest Media day slightly dampened my enthusiasm. I've always liked SSP but I have been out of the stock for a couple of years due to my fears that growth in the companies cable network division would slow more rapidly than analysts expect and that multiples applied to cable networks in general would contract as the industry matures.

So far, I've been wrong on slowing growth at SSP's nets but right on contracting multiples for the industry. Viacom (VIA.B) is the best pure play comparable and the stock has been lousy since the break from CBS was announced and implemented. I think the poor action in Viacom is one reason SSP shares have performed poorly so far this year but two other factors have hurt. First, the company's acquisition of uSwitch, a UK based comparison shopping service was greeted rudely due to dilution and growth concerns. Second, the botched acquisition several years ago of Shop At Home keeps getting worse.....

I think uSwitch will work out well and the street will come around. Management has thrown in the towel on Shop At Home and will either divest it or shut it down shortly. These two potential catalysts could allow SSP shares to rebound if two other things happen: (1) Shopzilla must continue to exceed expectations despite the heavy investment spending that management has telegraphed for 2006, and (2) the cable nets must hold their 2006 growth rate close to 20%.

I am looking for a fair amount to go right so I am awaiting evidence rather than getting long in anticipation. I am not sure if 1Q results will do the trick. I think that management will be confident but not aggressive in its commentary on 2Q and 2006 trends. A decent quarter and solid guidance will produce a small pop in the shares but I want to expect a big move before buying.

SSP shares have one of the highest valuations of established media stocks at close to 10 times 2006 EBITDA. The premium is deserved given the company's history but it doesn’t leave much room for expansion given that all other media multiples remain under pressure. SO to make money on SSP, you need to see sustainable 15% plus EBITDA growth. I hope 1Q provides that guidance but I am not sure it will.

For the record, consensus for 1Q06 calls for EPS of 40 cents on revenues of $686 million. For 2006, the current consensus EPS estimate is $2.07. Both the 1Q and full year estimates have fallen by 3-5% over the past 90 days.

Posted by Steve Birenberg at April 24, 2006 02:12 PM in SSP