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April 25, 2006

E.W. Scripps Results Hold Promise

E.W. Scripps (SSP) reported better than expected 1Q06 earnings. The shares are adding another $1 onto yesterday's gains of $1. Whoever was buying yesterday in anticipation of a good report is being rewarded. I think the gains over the last day and a half will hold but I believe upside is limited due to SSP's premium valuation to the disliked media sector.

SSP's earnings and 2Q guidance were complicated but both look good. Earnings were 49 cents including a 1 cent gain and excluding losses at Shop At Home, which is discontinued. I am not certain how consensus estimates considered these factors but I think an adjusted EPS figure is about 44 cents against consensus of 40 cents and guidance of 38-42 cents. Cable networks were better than expected driven by unusually low programming expense growth of 8%. Guidance calls for that figure to ramp to 15%. Revenue growth at the cable networks actually looks a little light at 17%. Broadcast TV also looks better than expected with big margin expansion relating to revenue benefits from the Super Bowl and the Olympics. Finally, Interactive revenues and EBITDA look great led by Shopzilla. Shopzilla revenue grew by over 100% and EBITDA flowed through in 1Q....

Guidance for 2Q looks in line with current consensus at 58-62 cents. This figure includes a greater than expected 6 cents of dilution from Interactive as investment spending will pick up significantly at Shopzilla against a seasonally slower period. There is also likely a 3-4 cent boost from discontinuing Shop At Home. I think it nets out to somewhat better than expected led by the cable nets.

One potential issue is that full year cable networks revenue guidance is up 15-18%, below where I think most analysts are expecting. Programming expenses growth for the year is forecast at 15%. I think that figure might be a little below analyst estimates so segment growth for the critical cable networks business looks like it should be OK for the full year. I've had ongoing concerns about maturity of the cable networks business so this bears watching.

On the plus side, management stated on the call that Shop At Home is "nearing an end" and the company "will soon announce a resolution." The market is anticipating this news but it will be good to resolve the situation.

Overall, SSP continues to balance its financial performance against its strategy to diversify from traditional media and add growth businesses in Interactive and Cable Networks. If the shares are to work in a big way from current levels, a pickup in growth is required as investment spending pays off and moderates. I do not think this will occur in 2006 but if trends support 2007 being a breakout year for growth, SSP shares could respond later in 2006. Management said that no acquisitions are in the "immediate future." I think they understand the market wants to see revenue growth flow through to operating and net income. When I feel comfortable that the growth vs. investment spending battle has tipped in favor of growth, I'll likely get long SSP.

Posted by Steve Birenberg at April 25, 2006 03:32 PM in SSP