Solomon's Select, by Mark Robertson, Managing Partner December 1st, 2015
SNI is a lifestyle and interactive services company. Its national television networks include Food Network, HGTV, Travel Channel, DIY Network, Cooking Channel and Great American Country.
Scripps Networks Interactive, Inc. is a lifestyle and interactive services company. Its national television networks include Food Network, HGTV, Travel Channel, DIY Network, Cooking Channel, Great American Country (GAC). The company also has several Internet-based media outlets (including food.com), and other distribution mediums, such as video-on-demand and mobile platforms.
The acquisition of a Polish “Kitchen Crashers” is causing some heartburn for investors but we’d urge some perspective. SNI has a track record of steady acquisitions. Historically, the results have been sound and the new segments are relatively small amidst a diversified smorgasbord of network programming. The stock price is well off its highs ($86) but the growth has been persistent and profitable.
Scripps Networks (SNI): Business Model Analysis. We’re pleased to include Scripps Networks in our Christmas Countdown this year. The shows and channels are well known to many of us and the Food Network probably provided some culinary ideas for Thanksgiving and next week’s celebrations. The Knoxville, Tennessee based company has delivered steady growth and top tier profitability. The judgments add up to a recipe for 19-20% annualized total returns.
Growth, Profitability, Valuation
The growth rate forecast (based on 2009-2019) is 8.0%. Based on the visual analysis of the business model, 7-10% seems feasible. Value Line is using 8.5% for the 3-5 year growth rate forecast.
2014 delivered a net margin of 20.5% versus a 7-year trailing average of 20.4%. Value Line has a long-term forecast of 22.6% for net margin.
The P/E ratio has been fairly steady over the years. We’re using 16x for the long-term projected average P/E, in line with Value Line’s 20×. The analyst consensus ranges from 12-20×.
SNI beat analyst estimates in Q2 and updated full-year guidance. While the underlying expectations for the business have not changed, SNI has updated full year 2015 guidance as a result of the TVN acquisition on July 2, 2015. The company now expects total revenue to increase about 12 percent.
The company has a fair amount of long term debt (56% of total capital) but the effective interest rate is only 3.27% — reflecting considerable financial strength. With a stock price of $53.59 at the time of selection, a return forecast of 20% is feasible.