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09/29/14 10:22:12 AM
FOCUS STOCK OF THE WEEK

THE E. W. SCRIPPS COMPANY (SSP)

THE E. W. SCRIPPS COMPANY : (SSP)



This week's Focus Stock of the Week is E.W. Scripps Co. (SSP: $17.77), which carries S&P Capital IQ's highest investment recommendations of 5-STARS, or Strong Buy. Following a corporate split in 2008 from Scripps Networks Interactive (SNI 78 ****), E.W. Scripps became an independent media company with business interests in newspaper publishing across 13 local markets and broadcast television comprising 21 TV stations; of those stations, 11 are affiliated with ABC, three with NBC, one with MyNetworkTV, five with Azteca America and one independent station. Advertising provides a primary source of revenue for SSP, representing about 84% of 2013 revenues for the broadcast TV segment, and 57% for the newspaper segment. The remainder of the revenues are mainly generated from print subscriptions, as well as TV licensing and syndication.



We see some strategic rationale for a pending stock-for-stock merger agreement with Journal Communications Inc. (JRN 9 NR), where the parties would combine their broadcast TV operations, and then spin off and merge their newspapers, thereby creating two independent public companies. Thereupon, the new E.W. Scripps, comprising the merged broadcast businesses - with a continued voting control by the Scripps family - would own 34 TV stations and 35 radio stations in 27 markets, and generate about $800 million in projected revenues. Also, the combined newspaper entity - which would be called Journal Media Group (JMG) - would generate about $500 million in projected revenues. Following completion of those transactions, SSP and JRN holders would own 69% and 31% of SSP, as well as 59% and 41% of JMG. The parties expect about $35 million in synergies from the transaction, expected to close in 2015, subject to regulatory approvals.



In recent years, the company has made a few other notable acquisitions and divestitures as it sought to realign its asset mix. In the second quarter of 2014, SSP acquired two TV stations owned by Granite Broadcasting for $110 million in cash. In December 2011, it acquired the TV station group owned by McGraw-Hill Broadcasting Co. -- four ABC affiliated stations as well as five Spanish-language affiliates - for about $212 million in cash. (S&P Capital IQ is a unit of McGraw Hill Financial.) In the second quarter of 2010, the company sold its character licensing business, United Media Licensing, for $175 million in cash to Iconix Brand Group, Inc.



The company's television strategy relies on local news content and compelling network and syndicated programs to drive its TV station ratings and, as a consequence, the segment's revenue and profitability. SSP has also stepped up its digital efforts to capitalize on newer outlets such as streaming, video on demand, and mobile devices. Of note, the company recently began to drive increased video views across its local news sites following its recent integration of Newsy, a digital video and news service acquired earlier this year. Meanwhile, its newspaper publishing business seeks to remain a key player in the local markets it serves, through the distribution of news and information across a variety of platforms, anchored by the market's principal daily newspaper. That division also seeks to complement its daily and community newspapers by creating new digital and print offerings, including distribution through mobile or e-readers.



After a 9.6% decline in the off-elections year of 2013, we expect total revenues to advance approximately 10% in 2014. Consistent with management's guidance, we anticipate a nearly 20% increase in TV segment revenues, fueled by a continued strong growth in retransmission revenues, and including about $65 million in political advertising revenues. However, this should be partly offset by a projected low-single digit decline in newspaper revenues, on continued weakness in both local and national advertising, versus relatively modest growth in subscriptions revenues. Based on S&P Capital IQ consensus, we note 2015 revenues are projected down about 23%, seemingly reflecting an expected completion of the pending merger and spin-off transactions, and in part also due to likely difficult comparisons on political advertising revenues.



We expect a sizable expansion of operating margins, to 11.6% in 2014 - versus 8.1% in 2013 - with high-margin political advertising revenues historically generating more than 90% flow-through to operating income. However, results should reflect higher employee-related costs and digital expenses due to increases in sales staff and other digital support costs, as well as higher program licensing costs (on higher network affiliation fees resulting from growing retransmission revenues), partly offset by some cost containment efforts. We forecast operating EPS of $0.62 in 2014 - the first election cycle that fully captures the acquired McGraw-Hill Broadcasting television stations -- and $0.46 in 2015. We note further share repurchases were halted on the July 2014 announcement of the pending merger with Journal Communications.



We believe the shares offer attractive upside at recent levels. Our 12-month target price is $22, based on a projected 15X 2015 EV/EBITDA, a relatively ample premium to the forward median multiples of many broadcasting and publishing peers, to SSP's 10-year historical average of 8.3X - and to the S&P SmallCap 600 Index. We see this premium partly justified by expectations of further value to be unlocked on the pending merger with Journal Communications - prior to which SSP holders would receive a special dividend of $60 million (approximately $1.07 a share).



Finally, we highlight some potential risks to our recommendation and target price. First, we think a potential derailment of the pending merger with Journal Communications - due to regulatory or other unforeseen hurdles - would have a major negative impact on our investment thesis. Next, as a relatively small-sized television broadcaster, SSP's leverage in successfully extracting higher growth of retransmission payments could be severely undermined by a current wave of industry consolidation in the multi-channel landscape. Lastly, we note the company's relatively high cyclical vulnerability to macroeconomic downturn, which would have a major negative impact on local and national advertising across its television and print businesses.



S&P Capital IQ's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.



 

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