Scripps Downgraded to Neutral - Analyst Blog

We downgrade our recommendation for Scripps Networks Interactive Inc. (SNI) to Neutral on the basis of its current valuation, which moved up by more than 36.6% in the last year.

The company continues to perform well primarily due to significant growth in both advertising and affiliate-fee revenue at the company's flagship Lifestyle Media businesses and higher total segment profit. Importantly, the struggling online shopping business sites of Scripps Networks have also started generating year-over-year growth.

The impressive performance of Scripps Networks in the first nine months of 2010 was mainly attributable to double-digit growth in advertising and affiliate-fee revenue at the company's flagship Lifestyle Media business and higher total segment profit. An improving global economic condition resulted in significant advertising revenue growth for many cable MSOs and media companies from the beginning of 2010.

Scripps Networks' advertising revenue climbed 33.7% year over year in the third quarter of 2010. We believe this trend will continue in the near future. The company has entered into a new distribution agreement with AT&T (T) for its lifestyle networks, which will be viewed by 2.7 million U-verse network subscribers of AT&T.

Acquisition of the controlling stake in Travel Channel has lifted Scripps Networks as the global market leader in lifestyle programming. The company now has three very powerful and completely distinct programming categories namely, home, food, and travel.

In the U.S., Travel Channel is among the top 10 cable networks in terms of primetime ratings growth that can be incorporated into other platforms like Internet, mobile, and social media applications. Travel Channel is a high-margin business and management expects Travel Channel to generate $200 million in revenues in fiscal 2010 and also improve its overall margins.

Nevertheless, we believe that these positives are already reflected in current valuation leaving little scope for above market gain. Scripps Networks is currently trading at the high-end of its 52-week price range. With respect to several valuation metrics, the stock is also trading at significant higher multiples compared with both the S&P 500 average and the industry average.

 
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