Scripps Guidance Ignites Questions; Too Soon To Buy

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E.W. Scripps (SSP) shares are deservedly down sharply following poor 1Q07 guidance issued in association with its 4Q06 earnings report. A re-evaluation of the prospects and valuation for the company’s Interactive division is also hurting the shares. Finally, management backed away from comments made at a conference earlier this month that it might have interest in spinning off, separating, or selling its newspaper division.
4Q results beat the street by a nickel, coming in at 75 cents due to particularly good margin performance as revenues of $693 million were about $7 million short of estimates. Margins at the Cable Networks and Broadcast TV stations were particularly strong. Broadcast TV was a big contributor to 4Q growth due to extremely large political advertising.
While the decline in the stock is mostly about the guidance and Interactive, there were a few issues in the 4Q figures. Cable Networks ad revenue growth of 11% could have been a bit stronger with possible questions at HGTV which saw just 7& growth and DIY which was flat. More significantly, the Interactive division had just 21% pro forma revenue growth.
The problems leading to the decline in the stock are twofold…..

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Verizon Should Keep Working Higher

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Verizon (VZ) reported solid 4Q06 results, closely matching analyst estimates is most key areas. VZ is a huge company with lots of closely followed metrics so there are always some pluses and minuses but in general I see little change to the story as a result of the earnings report and management commentary about 2007.
EPS came in at 62 cents, a penny ahead of estimates. Revenues of $22.6 billion were a little short of consensus of $23 billion but no one on the call seemed concerned.
Wireless was strong again with excellent gross adds, very low churn, and lots of postpaid adds. Revenues rose 16%. Margins took a hit on higher than expected adds but overall it was a very good quarter for wireless. VZ and AT&T (T) both performed well in wireless this quarter but VZ is building a better quality subscriber base as evidenced by its churn and focus on postpaid adds.
Wireline reported mixed results as usual. Access line losses in the consumer business were higher than expected and DSL adds a little low although FiOS based data and TV adds were a little better than expected. Management notes that customers additions net of access line losses are stable and beginning to increase slightly. This provides some hope that this business can return to growth later this year and in 2008.
Wireline results in business, formerly MCI, look a little better than expected with another quarter of low to mid single digit revenue growth. Merger synergies were bumped up to $900 million from $825 million.
Lots of questions concerned FiOS dilution. My interpretation is that management is sticking by their prior statements that quarterly dilution will peak in the first half of 2007. 1Q07 dilution is 11 cents with the whole year around 30 cents. Management speaks very positively about all FiOS metrics including coverage, penetration, and cost controls. Nevertheless, based on the questioning on the conference call, analysts remain concerned. It is not a hostile concern, however…..

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A Look at Apple’s Valuation

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After reading through a lot of analyst comments about Apple’s earnings, I think I captured the general consensus well with my follow-up piece. Most analysts agree with my bullish view and the fact that numerous catalysts exist over the balance of 2007, particularly as the June and September quarters become the focus of investor attention. As far as the March quarter, most analysts think that the guidance was conservative, especially as it relates to margins.
Following the big EPS beat in 1Q07, the consensus estimate has moved up to $3.18 vs. about $2.80 previously. Apple ended the quarter with $13.44 per share of cash. Extrapolating interest income from recent quarterly reports indicates that the cash balance might contribute about 43 cents to earnings in fiscal 2007. Adjusting the current price for the cash balance and its contribution to EPS reveals that APPL is trading about 27 times projected 2007 earnings. The multiple comes down another point if AAPL gets credit for its probable calendar year end cash balance. 2008 consensus is now at $3.75. Adjusting this figure for cash balances and interest income puts APPL about 21 times 2008 estimates.
As a comparison, Google trades…..

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A Potential Headwind For Comcast

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Keep on eye out for some negative publicity that could hit Comcast (CMCSA/K) in the next few weeks. Sinclair Broadcast Group (SBGI) and Comcast are getting close to the drop dead date over their negotiations for payment of retransmission fees by Comcast to Sinclair so that Comcast can continue to carry the TV broadcast signals of Sinclair local TV stations. If no deal is struck, Comcast customers could lose access to Sinclair’s network affiliated TV stations is some pretty sizable markets. Fights like this have garnered national publicity in the past.
Historically, cable operators have not had to pay cash for the right to retransmit signals of local broadcasters. Cable operators do pay cash to transmit the signals of cable networks such as ESPN, CNN, and HGTV. Typical fees range from 20 cents per month per sub for a less popular cable network to $2.50 per month per sub for ESPN. In fact, a significant part of your monthly cable or satellite bill is nothing more than these fees being passed along to you.
Sinclair and CBS (CBS) have been leading the charge for retransmission fees over the past year….

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Sears Holding Follow-Up

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Late last year, I sold my position in Sears Holding (SHLD) on the basis that I no longer had an edge in analyzing the shares. I am willing to buy back the shares if I feel my edge returns, so I was especially interested when Credit Suisse analyst Gary Balter, the clear axe in the stock, came out with a really interesting new report on SHLD last week.
What I like about Balter’s latest post is that it cuts against the conventional wisdom coming from the retailing experts who are usually quoted whenever SHLD is in the news. Here is some of what Balter had to say in his latest report:
Chief among the many criticisms of Sears is the argument that they are not investing to build a long term sustainable retailer but are milking the business. That argument ignores among other items the investments in Sears Grand and Sears Essential, Lisa Schultz and the apparel effort, Maureen McGuire and her marketing changeover and of course Alwyn Lewis. In the latest sign that Sears is serious about its business, last night the company announced its highest profile higher since Mr. Lampert took control.
Balter goes on to discuss the hiring of a highly regarded Best Buy executive to the position of Chief Customer Officer and the Office of the Chairman. Retailing experts will no doubt argue that no amount of management talent can save Sears and Kmart but maybe what these experts are really admitting is that they don’t understand Lampert’s strategy. Speaking of the retail strategy, Balter says:
Our view is that they do care, but that they care in a way that brings better service to the customer and better bottom line cash flow to the retailer. That is not the way the way many retailers drive their business, where comps is the primary factory, but is the way the better ones it….
Time will tell if the retailing strategy Lampert is using will prove successful. Depending on what strategic direction the company takes, the retail results may not even drive long-term stock performance. In the meantime, the lesson of SHLD, which has gone from less than $20 to $180, is that we should question conventional wisdom and remember that there is often more than one way to analyze a company.

One Reason The Market Has Done So Well

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I am not a trader and Northlake’s investment strategy is designed to outperform on a relative basis so whether the market goes up or down is a little less important to me than other money managers. However, that doesn’t mean that I am not amazed by the steady strength in the market since July. Steady adn strong are the operative words even though the absolute percentage gains have been large. Pullbacks have been minor and brief.
As I was driving the 465 miles home from Lake Superior to Chicago yesterday I was pondering the market and trying to get a better handle on what has been going on. When I pulled in for gas, a light went on. I know it is no surprise to anybody that oil and gas prices have collapsed but suddenly the impact on our collective pocketbook hit me. I paid $2.23 a gallon for gas down by over $1 per share from trips I took to Wisconsin in the past year. This trip is almost 1000 miles roundtrip, so at 20 miles a gallon in my 1992 Acura Vigor the savings is over $50. A commuter coming to downtown Chicago from some of the new suburbs might drive 60 miles roundtrip a day. That works out to a savings of over $60 per month. Small change to Wall Street tycoons maybe but real money in many checkbooks…..

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Radio Industry Should Boost Dividends

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Credit Suisse had an interesting report earlier this week about the radio industry that has broader implications. The thesis was that radio operators should establish signficant quarterly dividends as the best use of still substantial, if no longer growing, free cash flow. Dividends were preferred relative to share repurchases or just holding cash.
Among the reasons that Credit Suisse believes that dividends are the best use of radio industry free cash flow is that (1) it is a mature industry similar to others that offer high dividends, (2) there is empirical evidence that dividend paying stocks perform better, and (3) as baby boomers age and begin to shift toward more conservative asset allocations, the attractiveness of high dividend paying stocks will increase.
But most interesting is that Credit Suisse believes that high annual dividends will prevent “overinvestment” in the radio business….

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Motorola: Gains Off Analyst Meeting Don’t Last

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I know tech is very weak today so it might not make sense to read too much into it but Motorola (MOT) is giving up its Friday gains pretty quickly today. I still think the bearish view presented in my earnings coverage is the right call, especially for the first half of 2007.
Friday’s rebound gave too much credit to management promises that margins would rebound quickly. I think the risks are high that it takes longer to turn around the margins. After all, the management team now promising pricing discipline is the same one that has been addicted to volume gains at any price.

Tribune Auction Fails

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My colleague at StreetInsight.com, Chris Atayan, made a really good point that the failed Tribune (TRB) auction shows that private equity isn’t a cure for everything. I think another conclusion that can be drawn from the TRB auction is that private market value does not always noticeably exceed public market value. TRB shows that the public valuation of a business lacking growth potential and facing long-term secular challenges might just be an accurate valuation. No one will pay a premium if the supply (a poorly positioned company) is greater than the demand (the potential buyers of the company). Simple economics at work. In this case, there are not enough financial or strategic buyers to generated excess demand and the resulting price premium….

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Many Bullish Catalysts For Apple Over Next Six Months

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Apple (AAPL) shares continue to pull back sharply following release of the company’s latest quarterly earnings report. I remain surprised by the size of the pullback as well as the large amount of negative press Apple is getting surrounding the introduction of iPhone. I think a major disconnect has developed as many bullish catalysts exist over the next six months. Here are some follow-up comments to my earnings coverage now that I have had a chance to review analyst commentary:
First, I think comments that Mac sales were disappointing are fair. The number isn’t bad and the market share gains are large, but a major thesis for Apple bulls, myself included, is that Mac sales would cover for any maturing in iPods or even disappointment in the iPhone. Mac sales will still cover these risks but maybe not as much as previously thought at least for 2007. In the short term, you can score that one for the bears.
However, I think that is about all you can score for the bears, leaving aside any debate over the iPhone…..

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