Scripps Networks Interactive $SNI: Undervalued Niche Media Assets

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Scripps Networks Interactive $SNI: Undervalued Niche Media Assets


We like  Scripps Networks Interactive (NYSE SNI) based on strong revenue and profit growth from lifestyle media content business and ample free cash flows.  We expect to see the company generate earnings per share of $3.17 in 2012 and to increase EPS by 12-15% annually over the following three years.

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Scripps Networks Interactive is an industry leading developer of high-profile, lifestyle-oriented content for many media platforms including television, digital, mobile and publishing.  Previously headquartered in Cincinnati, SNI relocated to Knoxville, TN last year and has offices in New York, Los Angeles, Chicago, Cincinnati, Detroit, Atlanta, Nashville, San Francisco and Chevy Chase, MD.  SNI has 1800 employees; only about 5.6% work in corporate overhead.  On July 1, 2008, Scripps Networks Interactive, Inc. became a publicly traded company as the result of the separation of The E. W. Scripps Company into two independent, publicly-traded companies through the spin-off of Scripps Networks Interactive, Inc. to the E. W. Scripps shareholders.

The company’s media portfolio includes these popular lifestyle brands:

Scripps Networks Interactive $SNI: Undervalued Niche Media Assets

Keys to Investment Thesis

We like that Debt Net of Cash only accounts for less than 16% of assets. Although the company has total debt that represents 35% of total assets, the company could easily pay it down by devoting 3 years of net income from continuing operations to pay it down.  SNI has $760M in cash and $455M in strategic investments in international affiliates.  We like to net out the cash from the outstanding debt and we see that this reduces net debt to less than 16% of assets.

2011 Free Cash Flows exceeded Debt Net of Cash. SNI generated $673.3M in free cash flows from business operations in 2011, which exceeded SNI’s Debt Net of Cash of $623.85M.

SNI’s prudent cash management on behalf of shareholders. SNI repurchased $485M in stock last year net of share issuance for employee stock options.  SNI has $500M remaining under its current authorization and increased its dividend by over 26% to $.12/quarter, resulting in a .98% dividend yield.

We like the low capital expense requirements of the business. We can tolerate acquisition activity by SNI due to its low capital expense requirements.  We feel that acquisitions of small but established media content properties serve as a great avenue for the company to engage in growing its business.

SNI properties enjoy strong demand. Food Network is a Top 10 rated cable network and it is seeking to become a Top 5 network.  SNI saw more than 450,000 paid downloads of Food Network’s In The Kitchen app, making it the #1 paid culinary app in the iTunes Store.  Food Network has more than 1000 licensed products available through Kohl’s Department Stores and its premium wine collection Entwine ranked 34th in the premium wine category out of almost 400 labels.

HGTV is the #1 network for upscale women. With HGTV, SNI forged a strong bond between the love media consumers have for their homes and the entertaining and informative quality of HGTV’s programming. Being consistently faithful to that core concept is why nearly 1 million U.S. households tune in to HGTV during prime time every night. HGTV finished 2011 on a very high note, with the highest-rated December ever in total day for adults 25 to 54.

Media and Television Industry Outlook

Scripps Networks Interactive faces direct and potential competition from other cable and broadcast television networks, online and mobile outlets, radio programs, billboards and print media.  With capital markets showing measured gains, we believe that there is potential for consolidation. Examples include Cumulus Media’s acquisition of Citadel Broadcasting, Sinclair Broadcasting’s acquisition of eight TV stations owned by Freedom Communications in a move for Freedom to eliminate its debt, E.W. Scripps Company’s acquisition of McGraw-Hill’s 10 TV stations and SNI’s acquisition announcement of Travel Channel International.

Overall, we feel the industry is fairly valued, however we would use declines in the market to add to positions in high quality firms like Scripps Networks and gains in the market to sell weaker firms.  We are especially pleased that Scripps does not appear to have many direct competitors in the segments that SNI operates in due to the company’s focus on specialty niches. The only competition SNI has is primarily competition from other interests and consumer tastes, i.e. sports media, movies, business, outdoor and nature themed programming, news, popular music, religious themed content and ethnic-oriented shows, for example.





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