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Scripps Networks Interactive (SNI) is a niche player in the media industry. The company offers a variety of life-style content for television and the internet. SNI's media portfolio includes the popular television and internet brands HGTV, Food Network, Travel Channel, DIY Network, Cooking Channel, and country music network Great American Country. Scripps has been very successful in monetizing its brands. Its Food Network Magazine is the number one culinary magazine sold at newsstands and the sixth-ranks magazine overall based on newsstand sales. HGTV Magazine is off to a successful start. The several internet sites attract millions of page views and unique visitors. The company introduced an "app" called In the Kitchen which has had so many downloads, it is the number one paid culinary download from iTunes.

Scripps is taking active steps to expand internationally. In 2011, it completed the UKTV partnership with BBC Worldwide to acquire a 50% interest in UKTV. The Food Network UK doubled audience ratings, and is the leading culinary channel in the U.K. Food Networks has been launched in five markets in Asia and in six areas of Europe, the Middle East and Africa.

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Revenue

Second-quarter revenue increased 13% to $601 million from the prior year period and 12.3% sequentially. For the trailing 12 months, sales increased 10.4% to $2,193.5 million, year-over-year. Compared to F11, TTM revenues are up 5.9%. Quarterly revenues are higher in each of the last four quarters than in the prior year equivalent period. Revenues by major network were:

  1. Food Network $218 million+17%
  2. HGTV $205 million+8.4%
  3. Travel Channel $73.8 million+4.9%
  4. DIY Network $33.7 million+16%
  5. Cooking Channel$22.4 million+41%
  6. Great American$5.0 million-15%
  7. Digital Businesses$28.3 million+3.4%

As we see, growth was fairly robust across brands with the exception of Great American Country, which saw a 15% drop in revenue. The company provides guidance on revenue. The company expects sales to increase in the 10% to 12% range driven by advertising revenue.

Earnings

Second-quarter income from continuing operations increased to $142.3 million, or $0.93 per diluted share, compared with $133 million, or $0.78 per diluted share, in the second quarter of 2011. For the TTM period ending with the second quarter, net income grew to $490.8 million compared with $411.5 million for F11. On an EPS basis, earnings per diluted share for the TTM ending with 2Q12 are $3.15, compared with $2.71 per diluted share year-over-year.

Analysts are forecasting F12 EPS to be in the $3.17 to $3.46 range, with an average of $3.36 per share. The estimates for F13 range from $3.49 to $4.17. Analysts have been aggressive in revising their estimates with Thomson Reuters Research and I/B/E/S reported 19 upward revisions in the last month.

Margins

Operating margins have expanded every year since F08 when they were reported at 19.9%. Thereafter, operating margins are reported in the 37.7% to 42.8% range. The operating margin for the second quarter expanded to 43% from 40.1% in the first quarter. In 2008, the net margin was 1.5%. It grew to 21.9% in F09 and is reported at 22.4% for the trailing 12 months. Second quarter net margin is 23.7%.

Balance Sheet

In the most recent quarter, the company had $261.8 million in cash and $1,381.1 million in long-term debt. The long-term debt to capital ratio is 48.4% and the long-term debt to equity ratio is 94.0%. The company has a current ratio of 6.3X. By our estimate, SNI is generating $556.9 million in free cash flow. This implies that SNI could pay off its long-term debt in as little as three years. Long-term debt, as a percentage of working capital, is 130.5%.

Valuation

The market uses several different metrics to determine valuation. With a trailing P/E of 19.0X and a forward P/E of 17.8X, the market is assigning a premium to the shares of SNI. The PEG ratio, using estimated EPS and a consensus 3-5 year growth rate of 13.83%, is 1.3X. This implies that SNI may be undervalued. In the chart presented here, we provide several other valuation metrics including three based on enterprise value. Based on enterprise value to EBITDA, SNI looks undervalued.

Profitability

Scripps is a profitable company based on both earnings and free cash flow. One measure of profitability is Return on Equity (ROE). With an ROE of 30.8%, SNI is very profitable. We also look at free cash to confirm the quality of earnings. Here we find FCF of $3.66 per share which confirms the quality of earnings. Cash flow to invested capital is 19.49%.

Capital Allocation

Scripps Networks is paying an indicated dividend of $0.48 per share. In F11, the dividend payout was $0.375 per share. The board of directors declared a quarterly dividend of $0.12 per share payable on September 10, 2012. Additionally, the board authorized the repurchase of $1.0 billion of common stock. A prior authorization to repurchase $1.0 billion in stock was completed during the second quarter. The company had repurchased 4.6 million shares of common for $250 million. Overall, the company repurchased 21.4 million in common shares at an average cost of $46.72 per share.

The dividend payout of provides a yield of 0.8%. However, the repurchase of common shares in the past year increases the shareholder return (dividends and share buyback) to 10.7%.

Conclusion

Scripps Networks Interactive is an attractive stock with good potential for future growth. The company is shareholder friendly in that it returns significant value to the shareholder. When you combine high profitability, strong free cash flow, and reasonable valuation, you get an opportunity for capital appreciation.

Source: Scripps Networks: A Niche Media Winner