Why we're bullish about Scripps Network Interactive11th January 2016
Scripps Network Interactive is a developer of lifestyle-orientated content for linear and interactive video content platforms including television and internet. It owns 6 national television networks in the United States being Food Network, Travel Channel, HGTV, DIY Network, Great American Country and Cooking Channel. In 2014 around 69% of revenues came from advertising and 29% from affiliate fees from service providers that distribute Scripps programming content.
Scripps currently has a market capitalisation of around $7.1 billion and with current earnings of around $575 million is trading on a PE multiple of 12.5x. In addition, the stock is currently trading at trough multiples of its sales, despite no significant decline in operating margins.
Media businesses do face challenges in navigating the changes in the platforms on which consumers view content. We believe that businesses with above average content and reasonable management teams will be able to navigate these changes successfully whilst retaining the value of their proprietary content.
We therefore expect Scripps to continue to grow its earnings over the next 3 years. In the first half of 2015 revenue grew just under 3% whilst operating income grew at 6.5%. With Scripps recent acquisition of TVN Networks in Poland, continuing strong cash flow generation, further re-purchases of shares and the potential to enhance earnings through the acquisition of minority interests in Food Network and Travel Channel, we expect earnings to continue to grow.
In addition, once the market recognises the strength of the content that Scripps owns, we would expect the stock to re-rate to its historic valuation multiples. Furthermore, given the merger and acquisition activity that has happened in the content distribution industry over the last 12 months through the acquisition of DirecTV by AT&T, the pending takeover of Time Warner Cable by Charter and the announced acquisition of Cablevision by Altice amongst others, it is possible that the content owners could also consolidate to protect their own competitive position.
Scripps could either be a valuable acquisition target allowing us to exit at a premium multiple, or alternatively Scripps could acquire a competitor in a value adding combination.