Scripps Gets Media Earnings Off On The Right Foot

Earnings season for media companies began in earnest last week and really picks up this week. Among major companies, CBS, Time Warner, Viacom, and Comcast report this week. Smaller companies reporting include Northlake long positions Rogers Communications and Central European Media Enterprises, as well as Dreamworks Animation.

There were a couple of noteworthy reports last week that led to significant stock price reactions. On the plus side, E.W. Scripps (SSP) reported better than expected results and saw its shares rise over 2%. On the negative side, Regal Entertainment (RGC) reported in line results but caught a downgrade that led the shares to drop almost 4% on Friday. I'll provide more comments on RGC tomorrow.

Results from SSP were favorable at the company's growth business including cable networks and online. HGTV and Food Network rode strong ratings to better than expected advertising gains. Especially encouraging was a growing contribution from newer networks like DIY and Fine Living....

....Also notable was a big upside surprise in the Interactive division. Shopping comparison site Shopzilla saw a return to significant profitability as traffic picked up and traffic acquisition costs moderated. Last year Shopzilla suffered from expensive keyword pricing which management chose to counter by securing more direct traffic. The strategy appears to be working. SSP also got a boost from much lower losses at uSwitch, a UK based site that helps households compare utility and telecom bills. This business has been a bad acquisition from day one but management finally seems to have their arms around it. Both the cable nets and online businesses are being spun out together this summer while the newspaper and TV station segments will become a separate company. Those traditional media businesses are suffering greatly at the moment which limited the upside in the stock off the good quarter. I'd be a buyer of SSP if it approached the low $40s all else equal.

Scripps Onlne Competitor Gets Bought Out

Over the weekend, the Wall Street Journal reported that Providence Equity was taking a control position in shopping comparison website Nextag.com. Nextag is the #2 shopping comparison website, trailing, Shopping.com. The #3 shopping comparison site is Shopzilla.com, owned by E.W. Scripps (SSP).

SSP shares have rallied on takeover speculation due to similarities with Dow Jones (DJ). On a purely private market valuation, ignoring the fact that several of SSP's business segments are struggling (including Shopzilla), I can calculate a takeover price north of $60 driven by the value in HGTV and Food Network....

The sale of Nextag probably will heighten takeover speculation surrounding SSP. According to the Journal, Providence Equity's purchase values the entire company at $1.2 billion. The Journal article did not contain any revenue or EBITDA figures for Nextag but did note that it has been profitable for 13 consecutive quarters. Based on a review of site statistics at Alexa.com, Nextag looks like it could be two to three times as large as Shopzilla. Shopzilla composes most of SSP's Interactive segment which is forecast to produce revenues of about $95 million and EBITDA of $32 million. SSP has taken down estimates for Shopzilla twice this year as the cost of buying keywords to drive traffic to the site has turned uneconomical.

Despite the poor operating performance and uncertain outlook for Shopzilla, I think SSP investors will take comfort in the Nextag sale. Assuming that Shopzilla beings to grow again in 2008, I think that a private market value of at least $600 million is plausible. This figure is higher than the fundamental valuation likely implied today where a 14 multiple would create just $450 million in value for SSP's Interactive segment. The difference is only about $1 per share but in such a frenzied deal environment, the speculation that Shopzilla has value can only further heighten takeover speculation in SSP shares.

Nevertheless, I think the shares are at least 10% overvalued based solely on fundamentals. I understand why SSP shares have rallied 10% but I don’t think it will last unless takeover rumors emerge. I'd use current strength to sell SSP looking to reacquire or get long closer to $40.

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.

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.

In Major Change, Scripps Looking To Exit Newspapers

E.W. Scripps (SSP) is trading at a 52 week high following the company's announcement that it is considering alternatives for its newspaper business. This is a big change for SSP which has denied for many years its interest in divesting its newspapers or TV stations.

Newspapers represent a little over 20% of SSP's 2007 estimated EBITDA when 60% of EBITDA will come from the company's cable networks, which are dominated by HGTV and Food Network. SSP's strategy over the past decade plus has been to take the cash flow and balance sheet strength provided by its newspapers and TV stations and invest in faster growing new media assets. The first target was cable networks. The new target is online. The cable networks were mostly built internally, while the internet business, likely to approach 10% of EBITDA in 2007, is being built via acquisition.

Investors have bid up SSP shares by about 5% since the company began openly discussing the possible restructuring of its newspaper ownership. I think that is fair but about taps out the upside. First, separating the newspaper business is complicated by the provisions of the Scripps Trust that controls the company. I guess management must feel there are ways around the Trust document or they wouldn't be talking publicly but a simply structured separation might not be easy to achieve. Second, a sum of the parts approach to valuation suggests that SSP shares are trading at parity with or a premium to other entertainment conglomerates like Disney, Viacom, and News Corporation. An argument could be made that SSP will enjoy faster growth, can sustain longer off a smaller base, or is further along in building an internet business. However, I don’t see much upside to valuation based on current estimates.

And estimates is what will really matter....

Cable networks have been performing better than expected over the past six months due to strong spot pricing for advertising. I find myself increasingly isolated in my view that the growth rate in this business, industrywide, could surprise to the downside. On the flip side, I think the company is being conservative with its estimates for the internet businesses, Shopzilla and uSwitch. Shopzilla appears to have enjoyed a very good holiday season. Both business incurred heavy business development expenses in 2007. Those expenses might be sustained at high levels but they don’t seem likely to grow much further which would allow very high incremental margins on double digit revenue growth.

I am kicking myself for not getting long SSP while it was trading in the low to mid-$40s. My concern about slowing growth in the cable network advertising ended up being misplaced (for now, at least). Assuming the cable nets enjoy a solid 2007, I can create a legitimate valuation target in the mid to upper $50s but that is not enough for me after the latest move up.

So despite the good news that about a possible separation of the newspaper business, I am staying on the sidelines.

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.

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.

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.

E.W. Scripps Earnings Preview

I am leaning more bullishly on the shares of E.W. Scripps (SSP) ahead of its 1Q06 earnings due tomorrow before the open although my recent visit with the company at Prudential's Midwest Media day slightly dampened my enthusiasm. I've always liked SSP but I have been out of the stock for a couple of years due to my fears that growth in the companies cable network division would slow more rapidly than analysts expect and that multiples applied to cable networks in general would contract as the industry matures.

So far, I've been wrong on slowing growth at SSP's nets but right on contracting multiples for the industry. Viacom (VIA.B) is the best pure play comparable and the stock has been lousy since the break from CBS was announced and implemented. I think the poor action in Viacom is one reason SSP shares have performed poorly so far this year but two other factors have hurt. First, the company's acquisition of uSwitch, a UK based comparison shopping service was greeted rudely due to dilution and growth concerns. Second, the botched acquisition several years ago of Shop At Home keeps getting worse.....

I think uSwitch will work out well and the street will come around. Management has thrown in the towel on Shop At Home and will either divest it or shut it down shortly. These two potential catalysts could allow SSP shares to rebound if two other things happen: (1) Shopzilla must continue to exceed expectations despite the heavy investment spending that management has telegraphed for 2006, and (2) the cable nets must hold their 2006 growth rate close to 20%.

I am looking for a fair amount to go right so I am awaiting evidence rather than getting long in anticipation. I am not sure if 1Q results will do the trick. I think that management will be confident but not aggressive in its commentary on 2Q and 2006 trends. A decent quarter and solid guidance will produce a small pop in the shares but I want to expect a big move before buying.

SSP shares have one of the highest valuations of established media stocks at close to 10 times 2006 EBITDA. The premium is deserved given the company's history but it doesn’t leave much room for expansion given that all other media multiples remain under pressure. SO to make money on SSP, you need to see sustainable 15% plus EBITDA growth. I hope 1Q provides that guidance but I am not sure it will.

For the record, consensus for 1Q06 calls for EPS of 40 cents on revenues of $686 million. For 2006, the current consensus EPS estimate is $2.07. Both the 1Q and full year estimates have fallen by 3-5% over the past 90 days.

E.W. Scripps: Best Growth In Traditional Media

E.W. Scripps (SSP) shares are responding very favorably to the company's 4Q05 earnings report. I think three factors are at work. First, EPS came in above expectations at 54 cents vs. consensus of 49 cents. Second, the company announced that it is considering strategic alternatives for its home shopping business, Shop At Home. Third, Shopzilla continues to performing exceedingly well. When I consider these facts along with the company's 1Q06 guidance and general commentary, I think that the underlying value in the shares was boosted by a couple of dollars to the mid $50s. This doesn’t provide a lot of upside vs. the current stock price but it is good news.

EPS strength in 4Q05 came from good results at the Cable Networks and Shopzilla. Both were above expectations. The surprise at Cable Networks appears to be cost related as revenue growth of 21% was in line with expectations. Shopzilla performed very well across the board....

SSP provided 2004 and 2005 revenue and operating income results for Shopzilla in its press release even though it was not acquired until June 2005. If I follow the disclosures correctly, the division had 2005 EBITDA of just over $50 million. If so, that makes current analyst estimates for 2006 in the mid-$50 million range way too low. On the call, management refused to raise its guidance for Shopzilla noting that international expansion and other investments could hold back the growth. I think they are being way too cautious and that EBITDA of $60 million is a lock, maybe much higher. I am not sure what multiple to put on Shopzilla. Mid-teens seems OK as that would pay for the growth but provide a discount to Google. If so, the increased guidance adds about $1 to the underlying value of SSP shares. Arguably, momentum oriented investors interested in the internet would boost the value by even more.

I remain concerned that growth in Cable Networks could slow. 1Q06 guidance for 18-20% revenue growth would indicate further moderate deceleration. Affiliate fees grew in the low single digits in the fourth quarter, consistent with the maturity of distribution at HGTV and Food Network and the modest financial impact of subscriber growth at the emerging networks. This business is ten times the size of Shopzilla and over half of total company cash flow so any multiple contraction if the slowdown continues could cause trouble for the shares. For now, I think the risk limits upside.

Shop At Home has been the one major screw-up by SSP management team. By considering strategic alternatives and writing down goodwill, the error is being put behind them. Nevertheless, the division will still be a drag on growth until it is divested, shut down or moved into a joint venture. I think it is good news that management faced up to its mistake. It gives me more confidence in future the risk-reward tradeoff for future strategic decision-making.

Finally, Newspapers will have a tough 1Q06 with revenue forecast to rise 3-5% but expense growth up 10-13%. This will be offset financially by a boost at the Broadcast TV stations due to the Super Bowl and Olympics.

E.W. Scripps Earnings Preview

E.W. Scripps (SSP) reports before the open on Thursday. The company preannounced a shortfall late last year related primarily to continuing disappointing results at the Shop At Home division. Therefore, there should be little surprise in the headline EPS number which is projected at 49 cents for 4Q05. That would bring the year in at $1.85. Revenues for the quarter are projected at $698 million.

Looking ahead, current 1Q06 consensus calls for revenue and EPS of $687 million and 44 cents, respectively. For all of 2006, EPS are projected at $2.13, up 15%, on revenues of $2.88 billion.

I have always admired SSP and was long the stock for along time. Over the past year though, I've become a little frustrated with the shortfalls at Shop At Home and investment spending that is holding back earnings growth. However, what really concerns me is a potential slowdown in the growth rate of the company's Cable Networks. SSP has created immense value in this business, which now represents over half of the EBITDA, and arguably 75% or more of the equity value. Management deserves great credit for what has been mostly internal growth and also for making additional investments to sustain the growth....

That said, I fear a slowdown in this business for three reasons. First, subscriber is slowing dramatically at HGTV and Food Network, the two networks with the highest advertising and subscriber fees. The slowdown is because both networks are no on virtually every cable and satellite system. This will eventually slow the rate of growth of revenue. Some evidence of this is already in place. In 1Q04, revenue in this division rose 36%, in 1Q05 growth was 28%, while in the quarter to be reported growth is forecast at 20%. The company is gaining with Fine Living, DIY, and Great American Country but none of these command affiliate fees or advertising rates anywhere near HGTV and Food and I fear the growth in the emerging networks might not be enough to prevent unexpectedly rapid slowing in the division as a whole.

I could easily be wrong and 20% growth, heck 15% or even 12% is still damn good. But with the division producing almost $500 million in EBITDA next year, any slowdown that leads to a multiple contraction will really restrict the upside. Each multiple point of 2006 cable networks cash flow is worth about $3 per SSP share. So if growth slows and investors decide to pay 12 times, instead of 13-14, the upside in the stock is negligible.

One business owned by SSP that could make up the difference is Shopzilla, an online comparison shopping service. Purchased by SSP less than a year ago for $525 million, Shopzilla has surprised to the upside in a big way so far. Analysts appear to be looking for about $50 million in 2006 EBITDA. Based on recent results and a likely big 4Q, I think that figure could prove way too low. If so, you could add quite a bit of value to SSP shares. Shopzilla might be worth 15 times EBITDA implied in SSP valuation. At a minimum, the company got an unbelievable deal at $525 million. Potentially, if EBITDA were to come in 2006 at say $80 million, you could add over $500 million in incremental value to SSP, north of $3.

I am on the sidelines on SSP pending gaining comfort with the Networks growth rate. I hope I can get more positive and I would point investors concerned about traditional media to SSP to see what a focused and smart management team can do to maintain above average growth.

E.W. Scripps: No Sign of Weakness Yet at Cable Networks

E.W. Scripps (SSP) reported earnings in line with consensus but stronger than I had been anticipating. I came quite close to buying October or November at the money puts yesterday but in the end I decided against. As noted in my preview comment, I have a growing concern that fundamentals of the cable network business are deteriorating more than the Street is willing to admit. If this theory proves correct, the ramifications for the stocks of SSP and other major cable network owners (Viacom, Time Warner, Disney, News Corp) could be significant as most analysts are assuming a 13-14 times EBITDA multiple in their valuation models for cable network assets. I still believe my theory could play out in 1H06 but as far as SSP is concerned 3Q05 was another quarter of excellent results for the company's cable networks with no signs of weakness....

....SSP reported 38 cents in 3Q05 after adjusting for special items. One item will recur but is non-cash as the Denver Joint Operating Agreement which operates the Rocky Mountain News and Denver Post is upgrading its printing plant. Analysts asked a lot of questions about this on the conference call as it will cost the company about 7 cents in 2005 and another 4 cents in 2006. Since this is a non-cash charge and cost savings will begin to accrue the company in 2008, I don�t think analysts are worried about it but 2006 estimates will fall a bit.

The most important data in the quarter was that advertising revenue at the cable networks (HGTV, Food, DIY, Fine Living, Great American Country) rose 25%, above estimates of 20%. Guidance for 4Q05 cable network ad revenue is a healthy 25%. This puts to bed near-term concerns that weaker ratings and flattening subscriber growth (penetration levels of HGTV and Food have reached their maximum) might lead to slower ad growth. I still think that could occur and I don�t think analysts include it in their forward estimates.

The other big news out of the quarter is that the Shopzilla acquisition looks like a real winner. Shopzilla reported revenue growth of 121% and EBITDA of $7.3. Analyst estimates for EBITDA were closer to $4 million. Furthermore, 4Q05 EBITDA guidance for Shopzilla of $13-15 million is way ahead of current estimates. SSP paid a lot for Shopzilla but it appears it may have been worth it. The division could quickly grow to represent 5-10% of SSP's EBITDA and given the high EBITDA multiples applied to internet businesses, the division provides a nice boost to SSP's overall EBITDA multiple and mitigates some of the risk related to multiple contraction at cable networks.

Trends in SSP's newspaper and broadcast TV businesses in 3Q05 were poor but no different than industry trends. Cable nets now were over 60% of EBITDA in the quarter so these two traditional media businesses are becoming less important to financial results and valuation. 2006 does set up as a better year in TV as political advertising will return.

SSP shares aren�t moving higher despite an in line quarter that contains a lot of positive news in the company's key growth drivers. SSP has evolved into an entertainment conglomerate more akin to DIS, NWS, or VIA. Presently, SSP trades at a premium multiple to those stocks which is appropriate but limits upside unless there is a positive surprise. Exiting the quarter, I am moderating my evolving bearish view of SSP to a neutral one as current fundamentals are better than I expected and Shopzilla success supports the premium valuation.