I’ve never been a Martha Stewart fan. I have to admit, I was happy when her arrogant smile disappeared as she and her nauseatingly perfect arts & crafts were hauled off to prison.
So I’m doubly happy to see her company, Martha Stewart Living Omnimedia (MSO), now such an appetizing target for selling short. MSO recently reported a quarterly loss of $4.4M, which actually beat expectations. But a closer look at the report shows that the future may not be so bright…
1. MSO reduced 2007 revenue guidance to $330M from $340M.
2. TV revenue dropped 13% YoY on lower ratings for Martha’s shows. To me, this is a clear reflection of her waning popularity and cultural relevance. While she may have a hardcore group of loyalists who will continue to subscribe to her magazine and buy her licensed products, a lower TV audience means that customer growth will likely be limited.
3. MSO is counting on a new deal with Macy’s (M) to license home goods to replace the $40M in guaranteed annual revenue it no longer will get from Sears (SHLD). However, I don’t believe that this is the ideal time to be counting on home goods as a major growth engine given the slumping housing market. Just look at the stock charts of leading home furnishing retailers Pier One (PIR), Bed Bath and Beyond (BBBY), and Cost Plus (CPWM), and tell me that you think this is a great space to bank on.
4. MSO’s one impressive feat was its 40% increase in ad revenue in its publishing segment. But are magazines really going to drive MSO’s growth? Ad spending is increasingly being pulled away from print towards digital, where MSO still has a weak presence (internet contributed <5% of total revenue).
5. MSO has a forward P/E of 21 and a P/S of 1.8, valuing the stock as a high-growth company. Yet analysts are only expecting MSO to grow sales by 5.6% next year, despite its trading at a substantial premium to leading publishing and media companies like Meredith (MDP), Time Warner (TWX), and Disney (DIS). This for a company that’s not yet cash flow positive.
And I have yet to touch on the biggest risk of all faced by MSO- Martha Stewart herself. Like any company so dependent upon one person, any tragedy (or in her case, criminal recidivism) would decimate the stock.
As always, I recommend buying puts to limit the downside risk of selling a stock short- you never know when some head of a PE shop will get a crazy idea from his Martha Stewart-loving wife.
In this rocky market, there’s always a chance that the Fed may raise rates and spark a rising tide that lifts all boats, including MSO. For that reason, I’d look to scale into MSO puts- buy some now, and possibly more in a few weeks once the Fed’s action is clear.
Disclosure: SmartGuyAB owns MSO March ‘08 puts