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July 27, 2006

Scripps Looks Better Than Expected

E.W. Scripps (SSP) shares should rebound after the company reported better than expected 2Q06 EPS and provided guidance in line with current expectations. Most importantly, guidance for 2H06 advertising growth at Scripps Networks was not as bad as I and others had feared. Upside for SSP is limited, however, due to the premium valuation relative to pure play peers in the cable networks, newspapers, and broadcast TV. The premium is well deserved but I don’t expect to expand.

SSP reported EPS of 64 cents on revenues of $642. EPS were 2 cents above the high end of guidance and 4 cents above consensus. Scripps Networks and the internet businesses look to have had strong quarters. Profit performance at Scripps Networks looks especially solid as despite moderating revenue growth, management was able to drive margins.

On the conference call, management led off with a defense of Scripps Networks. Clearly, they recognize that concerns over the future growth of the cable network business is what is behind the more than 10% decline in SSP shares this year and the substantial multiple compression the stock has suffered....

Management noted that ratings at HGTV and Food have firmed in the last couple of months and that newer networks like DIY and Fine Living are getting large enough to contribute. Additionally, revenue gains at the online properties associated with the networks grew strongly, up over 50%.

Q&A contained several questions about the tepid cable upfront and how that squared with management guidance for 10-15% advertising gains at the networks in 4Q06. Management admitted that the upfront is off to a slow start but feels that with recen ratings rising in the upper single digits, that the guidance is realistic as the company can sell those ratings at a CPM up low to mid single digits.

I think this is the key takeaway from the call. Investors are rightfully worried that Scripps Networks could slow to single digit top line growth and face content costs rising more than 10%. Proving that they can outgrow the industry trends is essential to maintaining the premium multiple on the stock.

Briefly on the other divisions….

Newspapers struggles despite excellent advertising growth relative to industry peers. Higher newsprint costs and poor performance at the company's jointly owned papers in Denver, Cincinnati, and Albuquerque were at fault.

TV was uninspiring but should pickup in 2H06 due to political.

The internet businesses, Shopzilla and uSwitch, look to have performed well on the top line with an increase of over 100%. EBITDA did not surprise to the upside as both units are heavily reinvesting profits this year. I still think that guidance for Shopzilla is too low but any positive surprise would be unlikely before the fourth quarter. These businesses were 14% of corporate revenue in 2Q.

Finally, management threw cold water on the idea that newspapers or TV stations would be sold in the near future. This will come as a disappointment to some investors.

Posted by Steve Birenberg at July 27, 2006 03:24 PM in SSP