Trey  Thompson  May  7,  2013    Scripps  Networks  Interactive,  Inc.    Summary  

I  rate  shares  of  SNI  a  buy,  with  an  aggressive  

suitability.  The  12-­‐month  target  price  for  the  stock  is  

$81.00  which  implies  a  ~16%  upside  potential,  along  

with  a  modest  0.90%  dividend  yield.  I  believe  that  SNI  

is  well  positioned  to  continue  gaining  market  share  

with  its  leading  portfolio  of  lifestyle-­‐oriented  

networks.  Additionally,  the  company’s  strong  balance  

sheet  will  allow  for  continued  timely  investments  and  

acquisitions  to  expand  its  global  footprint.  Risks  to  

this  rating  include  a  decline  in  audience  ratings  for  the  

networks  and  the  potential  for  slowing  growth,  which  could  cause  the  earnings  multiple  

applied  to  the  stock  to  contract.    

 

Company  Description  

Scripps  Networks  Interactive  (SNI)  is  one  of  the  leading  developers  of  lifestyle-­‐

oriented  content  for  television  and  Internet.  They  have  operations  domestically,  as  well  as  

in  the  U.K.,  European  Union,  Middle  East,  Africa,  and  the  Asia-­‐Pacific  regions.  Revenue  is  

derived  principally  from  advertising  sales,  affiliate  fees,  and  ancillary  sales,  including  

licensing  of  consumer  products.  Operating  costs  are  primarily  programming  expenses,  

             BUY  GICS  Sector:      Consumer  Discretionary  Sub-­‐Industry:            Broadcasting  &  Cable    Key  Statistics  Ticker              SNI  Price  (05/03/2013)                                        $69.31  52-­‐Week  Range:                          $49-­‐70  Shares  Outstanding:                            148.38  Market  Cap*:                                                    10.28    Beta:                                                                1.06  Avg.  Daily  Volume*                                                    0.822    Dividend/Yield:                                    $0.60/0.90%  Payout  Ratio  (ttm):                      13.45%  LT  Debt*:                                          $1.385  LT  Debt/Equity:                                    0.76    12-­‐Month  Target  Price:                        $81.00  3-­‐5  Yr.  Est.  Growth  Rate:                 11%  P/E  2013E  EPS:                            19.15x  P/B  (mrq):                                5.45x  ROE  (ttm):                                              36.47%    *All  numbers  in  billions-­‐  ex  per  share  data  

employee  costs,  and  sales  and  marketing  expenses.  SNI  became  a  publicly  trade  company  

as  the  result  of  a  separation  from  The  E.W.  Scripps  Company  on  July  1,  2008.      

SNI  has  two  reporting  segments:  Lifestyle  Media  and  Corporate  &  Other.  The  

Lifestyle  Media  segment  includes  National  television  networks,  Food  Network,  Home  and  

Garden  Television  (HGTV),  Travel  Channel,  DIY  Network  (DIY),  Cooking  Channel,  and  Great  

American  Country  (GAC).  This  segment  also  includes  websites  and  other  media  that  are  

associated  with  the  aforementioned  brands.  The  Corporate  &  Other  operating  segments  

includes  results  from  International  brands  including:  Food  Network  UK,  UKTV  (50%  

owned)  and  Canadian  networks.  

Subsidiary  Breakdown:  Scripps Networks, LLC Delaware Television Food Network, G.P. (69% owned) Delaware TCM Sub, LLC (65% owned) Delaware Travel Channel, LLC (65% owned) Delaware Scripps Networks International Limited (Travel Channel International)

England and Wales

Lightdragon Limited England and Wales  

         

  Source:  Scripps  Networks  Interactive  2012  Annual  Report  

 

Investment  Rationale/Risk:  

I  think  that  SNI  is  reasonably  priced  given  its  favorable  growth  outlook  and  strong  financial  

position.  The  following  items  may  have  a  significant  impact  on  my  outlook  for  the  stock  

performance.  

Catalysts:    

-­‐ International  expansion  opportunities.  SNI  has  been  aggressively  increasing  

spending  to  grow  the  operations  of  its  international  subsidiaries.  In  April  2012,  they  

acquired  Travel  Channel  International,  which  has  already  had  a  positive  impact  on  

earnings.  SNI  has  a  solid  balance  sheet  that  should  allow  it  to  capitalize  on  other  

international  acquisitions  should  the  opportunity  present  itself.    

-­‐ Affiliate  contract  renewals.  SNI  routinely  negotiates  and  enters  in  to  multi-­‐year  

distribution  agreements  with  various  cable  and  satellite  operators.  As  consumer  

loyalty  to  programs  and  ratings  increase,  SNI  should  be  able  to  negotiate  more  

favorable  terms  for  these  contracts.    

-­‐ Share  repurchase  Program.  SNI  has  authorized  a  $1bn  share  repurchase  program.  

SNI  repurchased  $150mm  worth  of  shares  in  1Q  2013,  leaving  approximately  $750  

million  in  the  program.  This  should  be  a  positive  catalyst  for  the  stock,  as  the  

reduced  share  base  coupled  with  rising  revenue  should  lead  to  strong  EPS  growth.      

Risks:  

-­‐ A  slowdown  in  economic  conditions  would  reduce  corporate  advertising  and  

marketing  budgets.  This  would  negatively  impact  advertising  rates  for  SNI  and  other  

broadcasting  and  cable  networks.  Advertising  sales  account  for  ~69%  of  total  

revenue.    

-­‐  Rating  declines.  Changes  in  consumer  preferences  and  behavior  occur  frequently.  

SNI  must  constantly  adapt  programming  to  fit  these  changing  tastes  and  support  

continued  strong  ratings.  A  failure  to  adapt  to  changing  preferences  could  lead  to  

lower  ratings,  henceforth  lower  advertising  sales  and  less  favorable  affiliate  fees.  

-­‐ Negative  performance  of  equity  method  investments.  SNI  has  substantial  

investments  in  companies  that  it  accounts  for  using  the  equity  method.  Since  SNI  is  

not  responsible  for  the  day-­‐to-­‐day  operations  of  these  companies,  there  

performance  is  largely  out  of  management’s  control.    

 

Industry  Position/Environment  

The  broadcasting  and  cable  subsector  has  performed  well  over  recent  years  after  

recovering  from  the  economic  downturn.  In  2012,  the  sector  returned  44.7%  versus  13.7%  

for  the  S&P  1500.  The  industry  is  experiencing  several  challenges  to  their  traditional  

operating  model,  primarily;  the  introduction  of  video-­‐on-­‐demand  (VOD)  and  other  Internet  

based  media  delivery  systems.  There  have  been  many  legal  battles  and  media  attention  

drawn  to  this  issue,  but  overall,  the  actual  impact  has  been  minimal.  However,  this  issue  is  

not  going  away  and  there  will  likely  be  increased  pressure  on  the  industry  to  accept  the  

VOD  concept.    

Advertisement  spending  across  the  industry  has  been  very  strong  in  recent  years  

and  is  projected  to  continue.  1  This  has  been  lead  by  the  auto  industry,  a  historical  top  

spender,  which  has  finally  recovered  to  pre-­‐recession  levels  of  spending.  There  continues  

                                                                                                               1  Source:  S&P  Capital  IQ  Industry  Report  

to  be  a  slow  return  of  M&A  activity  within  the  industry  over  the  past  few  years,  and  there  is  

the  potential  for  further  consolidation.2  

Strengths/Weaknesses  

SNI  has  done  a  great  job  of  building  brand  loyalty  with  its  portfolio  of  leading  

network  programming.  Advertising  space  on  SNI  networks  is  particularly  desirable  to  

advertisers  because  SNI  delivers  content  that  focuses  on  specifically  defined  topics  of  

interest.  According  to  the  company,  SNI  viewers  have  the  highest  level  of  discretionary  

spending  among  all  cable/satellite  networks.    These  factors  both  lead  to  higher  ratings  and  

affiliate  fees  for  the  company.  

Cable  and  satellite  programming  has  been  gaining  significant  market  share  from  

traditional  (over-­‐the-­‐air)  broadcasting  television.  This  trend  has  increased  the  amount  of  

cable/satellite  subscriptions  and  has  allowed  Scripps  and  other  cable/satellite  networks  to  

increase  their  viewership  base.  In  addition,  cable/satellite  networks  receive  affiliate  fees  

(subscription  fees)  from  cable  and  satellite  operators.  These  fees  can  help  smooth  out  

earnings  volatility  since  they  are  multi-­‐year  contracts.  This  is  an  advantage  over  traditional  

broadcasting  companies  that  do  not  receive  such  fees.  Affiliate  fees  accounts  for  roughly  

30%  of  SNI  revenue.  

As  mentioned  earlier,  one  of  the  challenges  for  broadcasting  and  cable  companies  

has  been  increased  competition  from  VOD  and  Internet-­‐based  content  delivery.  By  

integrating  network  content  throughout  television,  Internet,  print,  and  mobile  media,  SNI  

has  capitalized  on  this  trend  before  many  of  its  peers.  This  should  remain  a  competitive  

advantage  in  the  medium-­‐term  as  other  competitors  adapt  their  own  strategies.    

                                                                                                               2  S&P  NetAdvantage  

One  weakness  is  that  only  5%  of  SNI  revenue  comes  internationally.  This  means  that  

almost  all  of  the  revenue  generated  comes  from  domestic  ad  spending  and  affiliate  fees.  

Additionally,  within  its  domestic  network  portfolio,  the  vast  majority  of  sales  comes  from  

food  and  home  lifestyle  programming.  If  viewer  interest  wanes  in  these  two  categories,  SNI  

could  see  a  large  decrease  in  advertising  revenue.  Within  this  weakness  lies  their  biggest  

opportunity  as  well.      

Opportunities/Threats  

  Scripps  Network’s  biggest  growth  opportunity  lies  in  international  markets.  

Currently,  only  about  5%  of  total  revenues  are  derived  internationally.  However,  in  recent  

years,  the  company  has  made  several  investments  to  increase  its  international  footprint.  

These  investments  include  UKTV  (50%  owned)  and  Travel  Channel  international.  A  healthy  

balance  sheet  and  strong  free  cash  flow  should  allow  SNI  to  make  further  timely  

investments  and  acquisitions  internationally  as  opportunities  arise.    

  The  greatest  threat  to  SNI  is  the  fact  that  ~69%  of  its  sales  are  derived  from  

advertising  sales.  The  price  that  advertisers  pay  SNI  is  contingent  upon  the  rating  their  

programs  receive  from  Nielsen  Media  Research.  In  turn,  these  rating  are  based  on  the  

number  of  viewers,  and  the  “attractiveness”  of  those  viewers  to  advertisers  (i.e.  income,  

age,  gender,  ect).  In  other  terms,  69%  of  SNI  revenue  is  based  on  how  many  viewers  they  

have  watching  their  programming.      

 

Earnings  Analysis  

  SNI  has  shown  strong  revenue  and  earnings  growth  over  the  past  four  years  driven  

by  increasing  advertising  sales  and  affiliate  fees.  Top  line  revenue  has  increased  from  

$1.3bn  in  2008  to  $2.3bn  in  2012.  Meanwhile,  earnings  have  increased  from  $24mm  in  

2008  to  $681mm  last  year,  a  110%  4-­‐year  CAGR,  reflecting  efforts  to  reduce  costs  and  

streamline  operations.    

 

Source:  Scripps  Networks  Interactive  2012  Annual  Report  

 

SNI  has  been  able  to  maintain  gross  margins  in  the  low  to  mid  40%  range,  which  is  the  best  

in  the  industry.  SNI  also  generates  industry-­‐leading  return  on  equity  (ROE),  averaging  in  

the  high  20%  range  over  the  past  few  years.    

 

Source:  S&P  Capital  IQ  

3

In the food category, Food Network finished

the year ranked ninth among all ad-supported

cable networks, maintaining its command of

the genre. It was the most-watched year ever

for the network.

Contributing to the network’s positive audience

trends is the enduring popularity of programs

like Chopped, Iron Chef America, Restaurant:

Impossible and Food Network Star. The

network picked up tremendous audience gains

with breakout hits like Restaurant Stakeout

with New York restaurateur Willie Degel and

competition shows, including Rachael vs. Guy

and Worst Cooks in America with Anne Burrell.

And we’re pushing for even stronger

momentum in 2013.

This year at Food Network, we’re celebrating

20 years of defining a wildly popular television

genre and shaping the nation’s, and now the

world’s, conversation about food. There’s no

doubt that Food Network is an iconic power

brand and will be for decades to come.

We’re seeing continued success with our

flanker brands, DIY Network and Cooking

Channel. DIY Network finished the year on

a high note with record ratings and strong

growth in primetime audience, driven by The

Vanilla Ice Project, the new Bronson Pinchot

Project and the ever-popular Crashers series

— all favorites of our avid fan base of home

improvement enthusiasts. And at Cooking

Channel, viewership rose steeply with new

shows, such as Not My Mama’s Meals with

Bobby Deen and Symon’s Suppers with

Michael Symon, driving audience numbers.

FINANCIAL HIGHLIGHTS*

Q!Total Revenue"!

Q!Total Segment Profit

*Excludes discontinued operations for all periods presented.

Q!Segment Revenue"!

Q!Segment Profit

+15% 4-YEAR REVENUE CAGR

$1,315 $1,367

$1,883$2,072

$583 $571$835

$977

$2,307

$1,041

08 09 10 11 12

36% Food Network

34% HGTV

12% Travel Channel

10% DIY Network, Cooking Channel, GAC

5% Digital

3% International and Other

CONSOLIDATED REVENUE BY BRAND

CONSOLIDATED OPERATING RESULTS*

(Dollars in millions)

LIFESTYLE MEDIA

(Dollars in millions)

+15% 4-YEAR REVENUE CAGR

(Dollars in millions) 2012 2011 2010

CONSOLIDATED

Operating revenues $ 2,307 $ 2,072 $ 1,883

Income from continuing operations 681 473 398

LIFESTYLE MEDIA

Segment operating revenues $2,256 $ 2,045 $ 1,867

Segment profit 1,136 1,050 904

Segment profit margin 50% 51% 48%

*Excludes discontinued operations for all periods presented.

Segment profit is used by the company’s chief operating decision makers to evaluate its business segments. See page F-37 of the company’s Form 10-K.

$1,312 $1,367

$1,867$2,045

$632 $637$904

$1,050

$2,256

$1,136

08 09 10 11 12

-20

-10

0

10

20

30

40

36

38

40

42

44

46

48

Dec12 Dec11 Dec10 Dec09 Dec08 Dec07 Dec06 Gross Margin Return on Equity (%)

Gross Margin  

ROE

For  1Q  2013,  the  most  recently  reported  quarter,  SNI  reported  EPS  of  $0.72  vs.  

expectations  of  $0.74.  The  EPS  miss  was  primarily  due  to  unfavorable  tax  adjustments  

totaling  $7.8  million  or  $0.05  per  share. Consolidated  revenues  of  $594mm,  were  up  11%  

from  the  same  period  last  year.  This  was  driven  by  an  11%  increase  in  both  advertising  

sales  and  affiliate  fees.    SNI  reported  a  very  strong  advertising  market  with  Food,  Retail,  

and  financial  companies  spending  the  most  for  the  quarter.  The  robust  increase  in  affiliate  

fees  was  the  result  of  a  digital  distribution  deal  with  Amazon,  Inc.  This  is  a  good  example  of  

SNI  capitalizing  on  new  digital  media  trends.  

SNI  also  announced  they  repurchased  2.4  million  shares  for  $150  million  during  the  

quarter,  which  leaves  ~$750mm  left  in  the  current  repurchase  program.  SNI  generated  

$268  million  in  cash  from  operating  activities  and  reported  cash  reserves  of  $421mm.    

One  of  the  biggest  positives,  in  my  opinion,  was  the  increase  in  revenues  YoY  for  

smaller  networks  in  the  SNI  portfolio.  Most  notably,  the  Cooking  channel  and  Great  

American  Country  (GAC)  with  32.7%  and  28.2%  increases  respectively.  Although  these  

sizeable  increases  are  coming  from  a  relatively  small  base,  it  is  nonetheless  a  step  in  the  

right  direction  for  SNI  to  grow  the  diversity  of  their  revenue  streams.              

 

 

 

 

 

 

 

Financial  Projections  

In  forecasting  the  income  statement,  balance  sheet,  and  Statements  of  Cash  flows,  I  used  

certain  assumptions  based  on  company  guidance  and  my  own  predictions.  For  2013  

estimates,  I  used  the  midpoint  of  the  company  issued  guidance.  In  FY  2014-­‐15,  I  generally  

carried  forward  items  consistent  with  2013  guidance.  I  assumed  slightly  stronger  revenue  

growth  based  on  accelerating  international  growth  and  continued  gains  in  Scripps’  smaller  

brands  such  as  DIY  and  Cooking  channels.  Please  consult  the  table  below  for  a  detailed  list  

of  assumptions  

 

Based  on  these  assumptions,  I  estimate  FY  2013-­‐15  EPS  of  $3.62,  $4.35,  and  $4.64  

respectively.  Please  see  Figure  1  in  the  appendix  below  for  compete  projections.    

 

Valuation  

  My  price  target  for  the  stock  is  $81.00  based  on  a  20.5x  forward  P/E  multiple  of  

blended  2013/14  estimates.  This  multiple  is  at  a  slight  premium  to  peers,  which  I  consider  

to  be  warranted  based  on  the  above-­‐average  revenue  growth  potential,  earnings  

consistency,  and  higher-­‐than-­‐average  profit  margins  and  ROE  of  the  company.      

In  deriving  the  20.5x  P/E  multiple,  I  first  divided  the  peer  group  in  two,  and  selected  

stocks  that  traded  at  P/E  multiples  above  the  median  of  17.5x  forward  2013/14  blended  

estimates.  Then,  I  averaged  the  P/E  of  these  companies  to  come  up  with  what  amounts  to  

an    ‘average  premium  multiple’.  Please  note  that  I  excluded  the  NFLX  from  the  premium  

multiple  as  the  P/E  was  well  over  100x  and  distorted  the  average.    

I  view  this  as  a  relatively  conservative  estimate  since  I  believe  that  SNI  is  the  best  

company  within  the  cable  and  broadcasting  subsector.  I  choose  to  value  the  company  using  

relative  valuation  mainly  because  growth  rates  far  exceeded  the  cost  of  capital  for  the  

foreseeable  future.  This  makes  it  difficult  to  come  up  with  an  accurate  terminal  value  for  

the  DDM  and  DCF.    

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix:  

Figure  1  –  Income  Statement  (3-­yr  historical  and  forward  projections)  

 

 

 

 

 

 

 

 

 

Figure  2  –  Balance  Sheet  (3-­yr  historical  and  forward  projections)  

 

 

 

 

 

Figure  3  –  Statement  of  cash  flows  (3-­yr  historical  and  forward  projections)  

 

 

 

 

 

 

 

 

 

 

 

Figure  4:  Comparative  common-­sized  Income  Statements  

 

 

Figure  5:  Comparative  Analysis