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January 30, 2007

Scripps Guidance Ignites Questions; Too Soon To Buy

E.W. Scripps (SSP) shares are deservedly down sharply following poor 1Q07 guidance issued in association with its 4Q06 earnings report. A re-evaluation of the prospects and valuation for the company's Interactive division is also hurting the shares. Finally, management backed away from comments made at a conference earlier this month that it might have interest in spinning off, separating, or selling its newspaper division.

4Q results beat the street by a nickel, coming in at 75 cents due to particularly good margin performance as revenues of $693 million were about $7 million short of estimates. Margins at the Cable Networks and Broadcast TV stations were particularly strong. Broadcast TV was a big contributor to 4Q growth due to extremely large political advertising.

While the decline in the stock is mostly about the guidance and Interactive, there were a few issues in the 4Q figures. Cable Networks ad revenue growth of 11% could have been a bit stronger with possible questions at HGTV which saw just 7& growth and DIY which was flat. More significantly, the Interactive division had just 21% pro forma revenue growth.

The problems leading to the decline in the stock are twofold.....

First, EPS guidance of 39-43 cents is well below the consensus of 52 cents. SSP is often conservative with guidance and regularly beats its internal forecast but this guidance is a lot worse than anyone would have expected. Several issues are contributing. Newspapers and Broadcast TV results will be a lot worse than expected, partially due to tough comparisons but also due to weaker than expected revenue and in the case of Newspapers a slight uptick in expenses. These segments aren't the driver of SSP valuation, so the shortfalls aren’t too troubling.

On the other hand, Cable Networks revenue growth is forecast at 10-12%, which looks a little light to me. Expenses are forecast to grow 9% so margins will expand but analysts were rightfully troubled by comments that the scatter market for Cable TV advertising is running in the low single digits. While the segment forecast is probably just a little below expectations, it is probably enough to again raise the issue of long-term growth for SSP's largest segment.

The second and most important issue arising from the quarter and guidance surrounds the Interactive division. This division is composed of Shopzilla, the leading shopping comparison website in the US, and uSwitch, the leading comparison shopping site for utility and communications in the UK. Guidance is for $9 million, DOWN from $13.9 million a year ago. Management attributes this surprisingly poor forecast to a big marketing push to bring uSwitch to the US and slower traffic growth at Shopzilla as the cost to purchase traffic via keywords is prohibitive. The street has always been skeptical of whether uSwitch would translate to the US market but Shopzilla has generally been bullet proof. Now issues are evident at both and they are issues that go to the long-term growth rate of these businesses. That is crucial for SSP shares because Interactive needs to be the next big driver of growth as Cable Networks slowly mature.

Without confidence in the long-term growth rate of Interactive, it is difficult to justify a premium valuation for SSP shares relative to Disney and Viacom. Part of the premium is vanishing today but numbers are always coming down leaving a significant premium intact. I need to tweak my spreadsheet some more but until confidence returns to the SSP story, I think some downside may remain and upside is definitely lacking. No need to rush out and buy today's weakness, even for a day trade.

Posted by Steve Birenberg at January 30, 2007 03:37 PM in SSP