This Media Company Is Quite Inexpensive Now

Scripps Networks Interactive has been generating growing cash flow in the past 10 years. It's cheap compared to its peers

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Feb 02, 2016
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Have you seen a company reporting growing earnings, but its share price is still on the downward trend? Scripps Networks Interactive (SNI, Financial) is such a company. In the second quarter last year, Scripps Networks experienced a 39% growth in earnings. However, its stock market price fell by 15% by August.

At the moment, it is trading at around $60.3 per share, nearly 25% lower than its peak at the end of 2014. Apart from the impact of the global economy, investors also worry about the declining trend of the TV advertising industry, as the world is shifting to digital media.

Scripps Networks is one of the leading companies that develops lifestyle-oriented content with six national television networks, HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel and Great American Country. This business is quite simple. The main revenue is generated from the sales of advertising, licensing content, consumer products and affiliate fees. Its main expense is programing expenses, employee costs and marketing. Around one-third of its revenue comes from affiliate fees while advertising sales account for two-thirds of the total sales.

In the past five years, Scripps Networks has experienced continuous growth in both the top line and the bottom line. Its revenue rose from $1.86 billion in 2010 to $2.57 billion in 2014 while the segment profits surged from $835 million to $1.12 billion during the same period.

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Source: Scripps Networks annual report 2014

The income from continuing operations for the company’s shareholders shot up in 2012 as we see in the table, due to the income tax benefit of $213 million from reversal of valuation allowances on deferred tax assets related to capital loss carry forwards.

In the third quarter, while its operating revenue jumped by more than 20% year over year, its operating income declined from $246.2 million to $238.4 million. The main reason for the decline in operating income was because of the surge in interest expense, from $12.2 million last year to more than $50.4 million this year. The increase in interest expense resulted from more debt that Scripps Networks incurred in 2015.

Indeed, as of September 2015, while Scripps Networks' equity was only $1.76 billion, its total debt was much higher, at nearly $4.3 billion, a leverage ratio of 2.44x. Because of growing via acquisitions, the company recorded a large goodwill and intangible assets, as high as $3.1 billion. Thus, most of the debt incurred going into acquisitions.

What makes me interested is that Scripps Networks has generated growing and positive operating cash flow in the past 10 years. In the past 12 months, the company has had $856 million in operating cash flow with depreciation and amortization of $135 million; its free cash flow came in at $721 million.

Compared to its peers including Discovery Communications (DISCA, Financial), Time Warner (TWX, Financial) and AMC Entertainment Holdings (AMC, Financial), Scripps Networks has the lowest free cash flow valuation among the four companies. While AMC, Discovery Communications and Time Warner all have the free cash flow multiple of more than 23, Scripps Networks' EV to free cash flow ratio is much cheaper, at 16.5x.

Million USD Scripps Networks AMC DISCA TWX
Operating cash flow 856 388 1077 4008
D&A 135 229 329 683
Free cash flow 721 159 748 3325
Enterprise value 11940 3760 18350 77800
EV/FCF 16.6 23.6 24.5 23.4

Conclusion

Scripps Networks has been expanding its business via acquisitions, which are financed mainly by debt. Its acquisitions seem to be working out, as the company generated growing free cash flow over time. With the recent weakness in the stock market, Scripps Networks seems to be quite cheap for investors to establish their positions.