Despite Strong Ad Numbers, It Might Be Too Much Of A Percentage For Scripps Networks' Revenue

Scripps Networks Interactive, Inc. SNI reported its 1Q16 results ahead of expectations and raised guidance. Goldman Sachs’ Drew Borst reiterated a Sell rating for the company, while raising the price target from $54 to $55. The analyst expressed concern regarding Scripps Networks’ high ad exposure and the uncertainty around US ad trends.

Scripps Networks reported its 1Q EBITDA at $347mn, ahead of the GS estimate of $307mn and the consensus expectation of $302mn. The results were driven by a beat in US Networks, backed mostly by better-than-expected US advertising and lower-than-expected opex, analyst Drew Borst mentioned.

The company’s adjusted EPS came in at $1.37, higher than the GS estimate of $1.09 and the consensus expectation of $1.03.

Growth To Decelerate

Scripps Networks’ performance during the quarter was boosted by US advertising growth of 14 percent y/y, as compared to the GS estimate of 9 percent. The beat in US ad growth was driven by “continued ad strength as well as strong ratings,” Borst wrote. The company projected growth of 15-19 percent y/y in 2Q16, versus 10-12 percent y/y recorded in 1Q.

The analyst pointed out, however, that a portion of the beat was on account of the timing of opex, since a delay in program debuts and corresponding marketing had shifted from 1Q to 2Q or 3Q. He added that profit growth would likely decelerate through the rest of 2016.

Scripps Networks raised its 2016 guidance for segment profit growth from 7 percent to 8 percent. Following 27 percent profit growth in 1Q, the FY16 guide of 8 percent growth implies 3 percent growth over the remaining three quarters of 2016, Borst commented.

“Although US advertising growth in 2Q should remain robust (GSe: 8%) given SNI’s good ratings and an acceleration in scatter strength, growth should moderate in the back half on difficult year-ago comps and normalization of the advertising price environment,” the Goldman Sachs report noted.

Borst mentioned that at 68 percent of 2015 revenue, Scripps Networks’ advertising exposure was high, and there was uncertainty regarding whether the recent US advertising strength would continue.