Should Martha Stewart Be Unpopular? (MSO, SHLD)

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 |  Includes: MSO, SHLD
by: Douglas McIntyre

Shares of Martha Stewart Living Omnimedia, Inc. (MSO) have been at the dog track for quite some time. The share price has marched relentlessly down over the last six months, with the share price being cut more than 50%.

If you strip away all the emotion surrounding the company, the operating business shows some trends that would lead a dispassionate observer to believe that there is life in the old girl yet.

Revenue for Q4 or was $84.5 million, up 40% from a year earlier. The company had operating income of over $2.5 million. It is not a great margin, but compared to a big loss a year earlier, it looks pretty good. Full year income rose over 12% to $209 million. Accounts receivable rose sharply year-over-year but payables did not. This could be another sign that the business is recovering.

The company's VP Finance forecast that revenue could go as high as $280 million in 2006. Operating income before depreciation, amortization and non-cash compensation is expected to be as high as $12 million. Still not a great margin, but the company expects to be free-cash-flow positive this year.

The company mentioned several other positive signs, one of which is that Q1 2006 advertising pages are trending up 70%.

TheStreet.com has commented that Martha Stewart's business is too dependent on their deal with Sears Holdings Corporation (SHLD). That may be so. But a 50% drops in stock price on improving numbers and a relatively strong outlook for the current year does not seem justified.

One further note. MSO should look at cutting its general and administrative costs. At nearly $17 million in Q4 2005, against the $84 million in revenue, these expenses are too high. Lose some weight and add another $5 million to the bottom line.

Douglas A. McIntyre is the former Editor-in-Chief of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited site in the world, according to MediaMetrix. He has also been chief executive of FutureSource, LLC and On2 Technologies, Inc. In the past, he has served on the boards of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.