When it comes to the cable TV industry, owning niche programming can be the key to success. Discovery Communications Inc. (DISCA) is a dinosaur in this area. But the smaller, yet very popular industry player Scripps Network Interactive Inc. (SNI) holds interesting possibilities for investors seeking long-term profits. Investment guru Jim Simons (Trades, Portfolio) recently added another 206% to his Scripps shares, which was a wise choice. Let’s see why.
Leading the Lifestyle Market Segment
After its spin-off from E.W. Scripps in 2008, the cable operator focused on developing a small, yet well-positioned brand portfolio. Thus, the company’s channels reach several million viewers in over 200 countries, with its diverse niche programming. Apart from owning cable networks Do It Yourself, Fine Living, and Great American Country, Scripps generates two-thirds of its revenue from the flagship channel Food Network and Home & Garden Television (HGTV). These cable franchises are the only ones with a fully committed lifestyle programming schedule, which allows for a loyal audience to grow steadily. As such, the once start-up networks, now watched by 100 million cable TV subscribers, have consistently ranked among the top 15 audience ratings for all U.S. networks. The dual revenue stream of monthly affiliate fees and advertising dollars should continue to profit from these audience ratings, as the company grows.
Since Scripps has weak international brand presence compared to other cable networks like Twenty- First Century Fox Inc. (FOXA), the firm recently acquired a 65% controlling stake in the UK-based Travel Channel International Ltd. Distribution of the Travel Channel brand in 20 languages, throughout 95 million cable households in 91 countries across the world, will undoubtedly cause revenue as well as margin boosts for fiscal 2014. The Asian pay TV network, Asian Food Channel, will also be a profitable add-on for the firm’s expansion into the Asian market. In fact, Scripps' total revenue, driven mainly by the Lifestyle Media segment, grew at a substantial 17.3% rate, which is expected to average at 6.8% over the next five years.
Distribution Agreements Boost Valuation
So far, Scripps has benefited from full ownership of its content, allowing distribution across multiple platforms to occur at minimal incremental costs. With 15,000 hours of programming, video-on-demand distributors like Comcast Corporation (CMCSA) were eager to strike streaming agreements with the company. However, the firm recently decided on Amazon.com Inc. (AMZN)’s subscription-based streaming service, Prime Instant Video, for future content licensing. This deal should level out some of Scripps' dependency on advertisement, which could cause losses in case of a recession, as well as buffer competition from start-up channels, like Google Inc. (GOOG)’s Youtube channels.
Despite a slight drop in operating margins, currently at 39.6%, the company’s metrics still record well above the industry average growth rate of 9.80%. This is also true for the firm’s return on capital, which experienced a slight decrease, but maintains an 88.70% rate, compared to the industry median of 29.6%. In terms of earnings per share, solid growth of 34.90% should be somewhat tempting for investors, especially considering the stock’s discount price of P/E (TTM) of 16.20x trailing earnings, compared to the industry average of 19.20x. The $10 stock price drop since December 2013 (stock price currently at $75.8) also makes this the right time for investors to look to Scripps for long-term profitability, which I believe will appear latest in fiscal 2015.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.