Scripps Networks Interactive Inc.

Transcription

1 January 27, 2015 Scripps Networks Interactive Inc. (SNI-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 01/03/2011 Current Price (01/26/15) $73.49 Target Price $ Week High $ Week Low $71.00 One-Year Return (%) 0.93 Beta 1.06 Average Daily Volume (sh) 879,814 Shares Outstanding (mil) 137 Market Capitalization ($mil) $10,068 Short Interest Ratio (days) 9.21 Institutional Ownership (%) 57 Insider Ownership (%) 26 Annual Cash Dividend $0.80 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 10.0 Earnings Per Share (%) 17.1 Dividend (%) 26.8 using TTM EPS 19.1 using 2015 Estimate 16.7 using 2016 Estimate 14.8 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page SUMMARY Scripps Networks reported third-quarter 2014 results whereby the bottom line outpaced the Zacks Consensus Estimate but the top line missed the same. Despite higher service and selling expenses, the company is witnessing substantial growth in Advertising and Affiliate-fee revenues at its flagship Lifestyle Media business. Scripps Networks also saw higher segmental profits mainly owing to strong rating upgrades. The company is gradually diversifying to mobile platforms for its content and is expanding its reach in Europe and Asia through a series of takeovers.. Meanwhile, Scripps Networks suffered a temporary setback as Discovery dropped its plan of acquiring it. Moreover, we remain quite concerned regarding higher costs of operations in 2014 as projected by management. We thus reaffirm our longterm Neutral recommendation on the stock. Risk Level * Low Type of Stock Large-Growth Industry Brdcst-Radio/Tv Zacks Industry Rank * 186 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 665 A 617 A 654 A 2,530 A A 708 A 644 A 683 E 2,679 E E 757 E 689 E 725 E 2,852 E ,005 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.77 A $1.08 A $0.87 A $0.90 A $3.62 A 2014 $0.87 A $1.14 A $0.93 A $0.94 E $3.88 E 2015 $0.99 E $1.28 E $1.06 E $1.06 E $4.39 E 2016 $4.98 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in Cincinnati, OH, Scripps Networks Interactive Inc. (SNI) was formed on Jul 1, It started trading publicly after the division of The E. W. Scripps Company into two publicly traded companies. Scripps Networks operates as a lifestyle content and interactive services company in the U.S. and internationally. The company is one of the leading developers of lifestyle-oriented content for television and the Internet, where on-air programming is complemented with online videos, social media areas and e-commerce components on companion websites and broadband vertical channels. Scripps Networks operates several cable and satellite TV networks. Scripps Network reports in two revenue generating segments: Lifestyle Media Segment: This segment operates national networks, which include Home and Garden Television (HGTV), Food Network, DIY Network, Cooking Channel, and Great American Country. The segment also provides Internet-based businesses through RecipeZaar.com, HGTVPro.com, and FrontDoor.com. It also holds an interest in FOX-BRV Southern Sports Holdings, LLC. Lifestyle Media accounted for 97.5% of the total revenue in the first half of Corporate: This segment primarily includes the operating results of Scripps Networks joint venture with Chello Zone Media. This joint venture was formed during the fourth quarter of 2009 to launch new lifestyle-oriented channels in Europe, the Middle East and Africa. Scripps Networks controls 89% of this joint venture. Additionally, this segment includes operating results from the international licensing of Scripps Networks national network programming, and the costs associated with the company s international expansion initiatives. REASONS TO BUY Scripps Networks is a pure-play lifestyle cable network consisting of six channels and operates across 200 countries. All these cable channels have loyal audiences, who also view Scripps Networks content on several non-tv platforms. This helps the company to explore the non-tv verticals, such as magazines (print media) and websites (Internet). In the reported quarter, Scripps Networks witnessed considerable year-over-year improvement with respect to several financial metrics. In the second quarter of 2014, the top line increased 6.5% on an annualized basis while almost every segment achieved incremental revenue growth. In the same period, Affiliate fee and Advertising revenues grew 4.1% and 6.5%, respectively, from the year-earlier quarter. The continuous improvement in the Advertising business is primarily attributable to rating improvements and strong scatter market pricing. The momentum should stay in the upcoming quarters as well. Moreover, the company continues to maximize its shareholders wealth by repurchasing shares and paying regular dividends. Scripps Networks completed the acquisition of U.K.-based Travel Channel International Ltd. (TCI). TCI distributes the Travel Channel brand in 20 different languages in 91 countries across Europe, Africa, the Middle East and the Asia-Pacific region. Further, the company made affiliate agreements with nearly 850 distributors of the above-mentioned countries. We believe that successful integration of the U.S. Travel Channel and the U.K. Travel Channel networks will position Scripps Networks as an undisputed leader in this segment. Equity Research SNI Page 2

3 Scripps Networks entered into a content licensing deal with Amazon.com. As per the deal, the past episodes of Scripps Networks popular TV channels will be available on Amazon s subscription-based video streaming service Prime Instant Video. The financial terms of the deal were kept confidential. This is Scripps Networks first online-only subscription distribution deal. We view this deal as incrementally positive for Scripps Networks. The company will continue to generate advertisement revenues from current shows along with additional revenues from past shows. Moreover, there is a possibility that the viewers of its past TV shows on Amazon s Prime may in turn become viewers of its live TV shows, raising the ratings of these channels. Higher ratings may lead to an increase in affiliate fees and advertisement rates. Scripps Networks Travel Channel has already gained considerable popularity in the U.K. by registering 57% year-over-year growth in viewers. The company expects to maintain the growth momentum in 2014 as it has a solid pipeline of popular shows in its portfolio. The Travel Channel has forayed into Russia, Poland and Philippines and the company s Food Channel will soon reach Vietnam and Taiwan. Also, in Italy, the Food Channel will be available under the Fine Living brand. REASONS TO SELL Approximately 70% of Scripps Networks revenues are derived from marketing and advertising spending by the corporate sector in the U.S. Advertising and marketing spending is sensitive to economic conditions, and tends to decline in recessionary periods. Scripps Networks earlier suffered from weak television ratings. The company had to compensate advertisers for the fewer number of viewers watching the programs. HGTV, Food Networks, and Travel Channel, the three most popular TV channels of Scripps Networks, witnessed a decline in audiences. It remains to be seen how effectively management can renew its programs in Scripps Networks suffered a temporary setback as Discovery Communications dropped its plan to acquire the network company. We believe a merger between Discovery Communications and Scripps Networks would significantly benefit both entities. Discovery Communications has a diversified content network and operates in more than 200 countries with over 100 TV networks. The lifestyle programming market is highly competitive. Scripps Networks faces stiff competition in both its Lifestyle Media and Interactive Services businesses from alternative providers of similar services. The company s national television networks compete with other broadcast and national television networks as well as with home video products and Internet usage for viewers. Additionally, Scripps Networks competes for advertising revenues with other media alternatives including several broadcast networks, the Internet, newspapers, radio stations, and billboards. RECENT NEWS Third Quarter of 2014 Financial Results Nov 6, 2014 The company s third quarter earnings of $0.93 per share handily beat the Zacks Consensus Estimate of $0.84. Earnings also exceeded the year-ago figure by 6.9%. Total revenue in the third quarter of 2014 climbed 4.5% year over year to $644.4 million. Revenues, however, fell short of the Zacks Consensus Estimate of $652 million. The third-quarter gross profit came in at $437.3 million against $438.7 million in the prior-year period. Quarterly gross margin stood at 67.9% compared with 71.1% in the year-ago quarter. Quarterly operating income climbed 2.7% year over year to $283.8 million. Operating margin, in Equity Research SNI Page 3

4 the reported quarter, was 37.1% against 37.7% in the prior-year period. Also, Scripps Networks repurchased 3.1 million shares for a consideration of $250 million. At the end of the quarter under review, Scripps Networks had $157.3 million in cash & marketable securities and $499.7 million of outstanding debt on its balance sheet compared with $686.4 million and $1,384.5 million, respectively, at the end of The debt-to-capitalization ratio stood at 0.20 versus 0.36 at the end of Results Segment Wise Lifestyle Media Segment Quarterly revenues came in at $618.1 million, reflecting an annualized growth of 4.2%. Within this segment, Advertisement revenues climbed 5% year over year to $422.9 million. Network Affiliate fee revenues were $187.4 million, up 3.2% year over year. The improvement was driven by annual contractual rate increases. Other revenues decreased 11.8% year over year to $7.9 million. Brand wise, HGTV revenues were approximately $235.5 million, up 7% year over year. Food Network revenues came in at $211.9 million, reflecting a 5.1% hike year over year. Travel Channel revenues declined 4.9% year over year to $73.5 million. DIY Network revenues were $36.9 million, up 9% year over year. Cooking Channel revenues were $28.5 million, up 7.2% year over year. Great American Country revenues stood at $7.7 million, up 16.9% year over year. Digital revenues fell 11.2% year on year to approximately $23.1 million. Other revenues totaled $3.3 million, up 9% year over year. Corporate Segment Quarterly total revenue of $27.1 million was up 8.5% year over year. Loss in the segment came in at $26.7 million, down 3% year over year. VALUATION Scripps Networks is a market leader for Lifestyle Media businesses. We believe strong viewership ratings will definitely help Scripps Networks to improve its advertising revenues. It seems that business enterprises are more inclined toward advertisement spending in a bid to win consumers. Several enterprises are thus raising their advertisement budgets. This is duly benefiting media companies like Scripps Networks. Scripps Networks is currently trading at 16.7x our fiscal 2015 earnings estimate. This is at a premium to the S&P 500 but at a discount to the industry average. With respect to our fiscal 2016 earnings estimate, the stock is trading at 14.8x, at a premium industry average to the but at a discount to the S&P 500. We believe Scripps Networks is fairly valued at this stage. We, thus, maintain our Neutral recommendation with a target price of $77, based on 17.5x our fiscal 2015 earnings estimate. Equity Research SNI Page 4

5 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low SCRIPPS NETWRKS (SNI) Industry Average S&P SIRIUS XM HLDGS (SIRI) GRUPO TELEVISA (TV) AMC NETWORKS- A (AMCX) SINCLAIR BROADC (SBGI) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA SCRIPPS NETWRKS (SNI) Industry Average S&P Equity Research SNI Page 5

6 Earnings Surprise and Estimate Revision History Equity Research SNI Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SNI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform %, Neutral %, Underperform 6.3%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research SNI Page 7