Wall St. Speaks Out on Scripps Networks Interactive -- RBC Capital Markets, LLC

Key points As the kids say 39Beat ampamp Raise39SNI reported adjusted segment EBITDA of 347mm vs our 295mm and consensus 302mm amp8211 a 14 beat vs the street Domestic Advertising growth was an impressive 14 yy vs expectations for 89 Overall revenue was 3 ahead and adj EPS exclPPA of 137 was 33 ahead of the street 2016 Adj Segment EBITDA is now expected to be up 8 yy vs 7 previously due to stronger than expected Advertising pricing and continued positive ratings from US networks Guidance for revenue growth was unchanged at 12 yyFocus on the skinny bundleRecent announcements by Hulu and YouTube that they will offer cablestyle streaming services has sparked interest around network inclusion which is of course very important for pure cable nets like SNI The company notes that 94 of its viewing is done in a C3 window so live TV vs VOD remains the core of its monetization While SNI did not commit to any specific streaming services it did note the current differential between viewership and affiliate fees which we calculate as 5 of cablebroadcast universe 2015 C3 24hr ratings vs just 1 of universe 2016E Affiliate Fees SNI also noted that it tends to be less exposed to cord shaving on account of its more affluent demo Scripps noted an increase in ratings at all 6 US networks in Q1Deleveraging continuesSNI paid down 325mm in debt and with EBITDA growth its gross leverage came down from 32x in 4Q15 to 30x We think SNI remains focused on deleveraging for the time being following last year39s downgrade in the debt rating post the TVN deal We note that TVN and international affiliates are increasingly contributing to earningsSolid result but we find Ad strength tougher to ownSNI shot the lights out this quarter with stellar Ad growth and increased guidance But we continue to be weary of pricing too much Ad growth into our forward estimates as we think Advertising is increasingly short cycle for all of Media As such our target multiple for SNI39s Cable Nets is at parity with our universe while our 93x target CY1617 EVEBITDA is at an 11 discount to our Media universe 14x PE due to lower cash deployment We expect to be more constructive when the acceleration of Affiliate Fees and restart of cash deployment comes into view On higher estimates we raise our target 2 to 72 which maintains our Sector Perform ratingValuationWe value all of our Media stocks on a sumoftheparts basis with target multiples applied to the EBITDA of the business components Given the low visibility of various Media earnings streams and potential for lumpy outcomes SVOD and syndication sales program writedowns we think a blend of current year and next year estimates is most appropriate We currently value Media stocks on 5050 CY1617 estimatesFor SNI we estimate 143bn in CY1617 EBITDA which is derived entirely from the cable networks We use a 93x EVEBITDA multiple largely inline with peers with healthy ratings partially offset by our concerns on growth and cord cutting Our combined enterprise value is 133bn implies a 93x EVEBITDA multiple amp8211 a discount of 11 vs our coverage universe After deducting minorities Food Network and net debt and adding equity method investments we derive an equity value of 92bn Applying our ending CY16 share count our target price for SNI is 72 resulting in an ETR of 16 and supporting our Sector Perform rating Our target implies 14x CY1617 PE on 4 EPS growthPrice target impedimentsSeveral factors could impede achievement of our price target and ratingThe loss of carriage agreements presents risk SNI depends heavily on the carriage of the company39s premium cable channels on pay TV operators A loss of these carriage agreements could adversely impact affiliate revenue which represents a substantial portion of the company39s total revenueA decline in advertising expenditures could materially impact operating results SNI39s business has significant exposure to advertising An adverse change or decline in overall advertising expenditures could negatively impact many of the company39s business unitsMuch of SNI39s business is based on consumer preferences for content which can be difficult to predict The preferencedriven nature of SNI39s contentdriven business can be volatile and is based on consumer preferences which can change rapidly An unexpected shift in these preferences could impact SNI39s operating results and therefore our price target and ratingInternational revenues are at risk to foreign currency SNI39s networks are distributed overseas resulting in revenues derived in foreign currencies vs costs in USD The value of these overseas revenues can fluctuate based on currency movements TVN39s profits are also translated back from the Polish ZlotyScripps could be acquired With a market cap of 82bn SNI is certainly of size that it could be considered for acquisition The decision to sell would come down to the Scripps Family Agreement A significant premium to the trading price would be considerable upside vs our targetAll values in USD unless otherwise notedPriced as of prior trading day39s market close EST unless otherwise statedLink to Full Research Report including Required Disclosures and Disclaimeramp174 Registered trademark of Royal Bank of Canada RBC Capital Markets is a trademark of Royal Bank of Canada Used under licenseCopyright amp169 RBC Capital Markets LLC 2016 Member SIPCThe opinions and points of view expressed in this commentary are exclusively the views of the author and do not necessarily represent the views of MediaVillagecom MyersBizNet Inc management or associated bloggers amp160amp160

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Wall St. Speaks Out on Scripps Networks Interactive -- RBC Capital Markets, LLC

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Wall St. Speaks Out on Scripps Networks Interactive -- RBC Capital Markets, LLC

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