Our view: SNI posted a very strong quarter with stellar Ad growth and a modest guidance raise. This leg in the story is undeniably strong, but with Affiliate Fee growth and cash deployment below the peer group we remain Sector Perform.
As the kids say, 'Beat & Raise'
SNI reported adjusted segment EBITDA of $347mm vs our $295mm and consensus $302mm – a 14% beat vs the street. Domestic Advertising growth was an impressive +14% y/y vs expectations for +8-9%. Overall revenue was 3% ahead and adj. EPS excl-PPA of $1.37 was 33% ahead of the street. 2016 Adj. Segment EBITDA is now expected to be up +8% y/y vs. +7% previously due to stronger than expected Advertising pricing and continued positive ratings from U.S. networks. Guidance for revenue growth was unchanged at +12% y/y.
Focus on the skinny bundle
Recent announcements by Hulu and YouTube that they will offer cable-style 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 cable/broadcast universe 2015 C3 24-hr 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 Q1.
SNI paid down $325mm in debt, and with EBITDA growth its gross leverage came down from 3.2x in 4Q15 to ~3.0x. We think SNI remains focused on deleveraging for the time being following last year's downgrade in the debt rating post the TVN deal. We note that TVN and international affiliates are increasingly contributing to earnings.
Solid result, but we find Ad strength tougher to own
SNI 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 SNI's Cable Nets is at parity with our universe, while our 9.3x target CY16/17 EV/EBITDA is at an 11% discount to our Media universe (14x P/E) 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 rating.
We value all of our Media stocks on a sum-of-the-parts 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 50%/50% CY16/17 estimates.
For SNI we estimate $1.43bn in CY16/17 EBITDA, which is derived entirely from the cable networks. We use a 9.3x EV/EBITDA multiple, largely in-line with peers with healthy ratings partially offset by our concerns on growth and cord cutting. Our combined enterprise value is $13.3bn implies a 9.3x EV/EBITDA multiple – 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 $9.2bn. 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 CY16/17 P/E on 4% EPS growth.
Price target impediments
Several factors could impede achievement of our price target and rating.
The loss of carriage agreements presents risk. SNI depends heavily on the carriage of the company's 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 company's total revenue.
A decline in advertising expenditures could materially impact operating results. SNI's business has significant exposure to advertising. An adverse change or decline in overall advertising expenditures could negatively impact many of the company's business units.
Much of SNI's business is based on consumer preferences for content, which can be difficult to predict. The preference-driven nature of SNI's content-driven business can be volatile and is based on consumer preferences, which can change rapidly. An unexpected shift in these preferences could impact SNI's operating results, and therefore our price target and rating.
International revenues are at risk to foreign currency. SNI's 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. TVN's profits are also translated back from the Polish Zloty.
Scripps could be acquired: With a market cap of $8.2bn, 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 target.
All values in USD unless otherwise noted.
Priced as of prior trading day's market close, EST (unless otherwise stated).
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