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October 17, 2006

Solid Quarter From Scripps

E.W. Scripps (SSP) reported better than expected 3Q06 earnings driven by strong performance from the company’s cable networks and political advertising at the company’s TV stations. The shares are up sharply in a weak tape as they deserve to be.

Cable Networks and Interactive (Shopzilla and uSwitch) are about 2/3rds of SSP’s EBITDA and account for virtually all the incremental growth. As long as these two businesses continue on their current growth track, SSP shares are likely to remain leading performers within the media sector. 4Q06 guidance and very preliminary comments on 2007 suggest that both divisions are on track.

SSP reported 48 cents against consensus of 40 cents and guidance of 38-42 cents. The upside was largely driven by operating upside in cable network and TV station margins. Overall, revenue was in line with estimates including at the two outperforming divisions. A lower than expected tax rate added a little over 1 cent to the quarter....

Despite the upside in the quarter, guidance for 4Q06 brackets the current consensus. Analysts will likely view the guidance as conservative, particularly at the Interactive and Cable Network operations. Newspapers look a little light in 4Q due to expense growth against flat revenues, while Television should continue to benefit from heavy political spending.

In 3Q06, Cable Networks came in about $8-10 million ahead of expectations on the EBITDA line as programming expenses rose just 9% against a revenue gain of 19%. Advertising revenue surprised to the upside at 18% with affiliate fees growing slightly less than expected at 12%. The 19% increase must have been driven by success with online and VOD initiatives. The outlook for 4Q is for revenues to grow 11-13% with expanding margins. Analysts will be looking for upside in revenues given currently strong ratings at HGTV and Food and a healthy scatter market.

Interactive projections for 4Q seems low with EBITDA of $26 million, up 30%. Last year, Shopzilla alone had EBITDA of $20 million. On the call, the company indicated that they hoped this was conservative guidance. They also indicated that investments to expand both operations internationally should begin to pay off. Interactive will produce EBITDA in 2006 of $65 million, about 7.5% of the corporate total. The contribution will grow next year and this division remains a driver of SSP shares and the premium valuation.

SSP shares trade at 11 times 2006 EBITDA and 21 times earnings. These represent premium valuation levels relative to other traditional media stocks. The premium is well deserved as management has transformed the company with its well-timed and well-managed investments in Cable Netwroks and Interactive. The only negative I can see is the maturity of HGTV and Food Network. I have incorrectly anticipated a slowing growth rate for these businesses and the smaller networks aren’t nearly large enough to drive segment growth. Current rating strength and growing online presence for both networks should keep the “slowing growth” scenario buried for the next few quarters. In the meantime, Interactive seems poised to produce big upside in 2007.

Put it all together and SSP shares are probably worth owning. I’ll be stubborn and look to buy on weakness.

Posted by Steve Birenberg at October 17, 2006 10:48 AM in SSP