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April 25, 2007

The Bloom Comes Off the Scripps Rose

E.W. Scripps (SSP) reported in line 1Q07 earnings but guidance for 2Q and implied guidance for 2007 is well below street estimates. In my preview I suggested that estimates could come down and that the stock would be attractive in the $30s. It looks like we might get a chance to buy at that level.

1Q results were a little better than expected on the EPS line driven by the Cable Networks segment where revenues rose 13% and EBITDA rose 20%. This good performance was partially offset by worse than expected performance at the Newspapers where revenues fell 9% and EBITDA fell by 37%. SSP's newspapers outperformed last year partially due to their Florida exposure. That is now coming back to bite as real estate advertising is collapsing and other categories remain poor.

TV station and Interactive results in 1Q were pretty close to estimates. TV actually was a bit better than expected with revenues falling 8% and EBITDA declining 27%. The stations are actually performing well but had tough comps due to political, Super Bowl, and Olympic advertising a year ago. Interactive came in a little worse than expected as pro forma revenues fell 9% and the division at operated at a small loss....

SSP has stumbled badly over the past few years only to be bailed out by ongoing strong growth at the cable networks and above industry average performance at its newspapers. The last three major acquisitions have all faltered. Shop At Home turned into a steady money loser and was sold at a fire sale price. Shopzilla got off to a great start but as early as spring 2006, it was becoming evident that EBITDA would not ramp as it appeared it could. Now Shopzilla faces a transition in its business model away from purchased traffic with a new management team in a toughening competitive environment for comparison shopping. uSwitch was a controversial acquisition form the beginning and have never performed up to management expectations. The latest problem is that lower energy prices in the UK have reduced use of the service. Of course, until today management had never mentioned the sensitivity of uSwitch's results to energy prices.

SSP management deserves significant credit for developing the cable network business as a diversification from the company's traditional focus on newspapers and broadcast television. Cable networks continue to grow at a double digit rate and are now about half of the company. However, nothing done over the past few years has built on the cable networks success.

Since I still see cable networks growth slowing gradually to upper single digits, without success in other diversification efforts SSP is starting to look like every other diversified media company. That would be fine if the stock were not valued at a premium to the sector. I think the premium is no longer deserved. In fact, with growth in 2007 well below diversified peers like Disney and the 2008 outlook completely up in the air, I think SSP should trade at a discount to the group. That would require the stock to be in the upper $30s. I think that is where it is headed. All else equal to today, I'd
be a buyer at those levels.

Posted by Steve Birenberg at April 25, 2007 10:19 AM in SSP