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Scripps Networks Channels Value

Shares offers good upside, low risk and classic GARP (growth at a reasonable price).  
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Scripps Networks Interactive (SNI) is a vertically integrated lifestyle and entertainment provider that was spun off from E.W. Scripps (SSP) on July 1, 2008. It is best known for HGTV (Home & Garden TV), The Food Network and Travel Channel cable networks, which cater to upscale women in the 24- to 54-year-old age group -- a very desirable advertising demographic.

Revenue and profit have surged since the spinoff. Earnings rose to $3.83 per share in 2014 from $1.63 in 2008. A strong first quarter has median estimates for 2015 standing at $4.40. Dividends have also grown, moving from $0.15 in 2008 to an annual rate of $0.92 after a boost earlier this year.

Shares bottomed near $18 in 2009 and peaked at $86.60 early in 2014 but gradually cooled off to close on May 22, 2015, at $68.40. Even after that pullback SNI has outperformed all but 15% of Value Line's 1,700-company main research universe over the past five years.

Scripps' May valuation represented a discount to its average price-to-earnings multiple of 19.1x. Note that I excluded 2012's PE from my calculation as a major tax credit temporarily lowered SNI's effective tax rate below 10% from a more normal 28% to 31% that year.

When popular with investors, SNI has commanded 22x to 27x earnings. Yields when overvalued dipped to fractions of 1%. Periods of market turmoil pushed the shares under 12x briefly, along with current yields above 1%.

At $68.40, Scripps offers the best cash distribution rate since 2009 and its lowest entry valuation since 2011's lows. A recently announced $1.5 billion debt issue will pay for a move into the Eastern European market, while immediately adding to earnings due to lower debt-service expense. A simple return to a normalized PE could support a 12-month target above $84, and even $94 over the next 24-months when earnings are projected to hit $4.90 per share.

Those goal prices appear quite attainable. SNI touched $86.40 in 2013 and a bit higher than that almost 16 months ago. Fundamentals have improved since then, even as the stock became cheaper.

Option writers can venture in via Dec. 18, 2105, expiration puts at $65 and $70 strike prices. The more conservative ones fetched $2.90 on Friday, May 23, bringing the break-even point down to $62.10. That provided a 9.2% margin of safety from the trade inception price. A reasonable $5.20 premium on the $70s would leave put option sellers committed to buying at $64.80, if exercised, while offering more upside if SNI rebounds to above $70 by December.

The "if put" prices on both these option sales is lower than the actual worst-case trades on Scripps dating back more than 26 months.

Standard & Poor's enigmatically carries a 3-star (out of 5) Hold rating on SNI while calling fair value at $97.20, noting the firm's desirable traits of high quality and low volatility. Go figure.

Buy the stock, sell some puts or do both. SNI offers good upside and low risk in classic GARP (growth at a reasonable price) fashion.

At the time of publication, Price was long SNI shares and short SNI puts, although positions may change at any time.