We upgrade our recommendation for Scripps Networks Interactive Inc. (SNI) to Outperform. According to our assessment, an improving advertising market for cable TV networks and massive growth in affiliate fee revenue will boost the company’s financials in the near-term. The flagship Food Network and HGTV continue to enjoy strong ratings from their core prime-time viewers. Scripps Networks has acquired a majority stake in Travel Channel, which we believe will be incrementally positive for the company’s long-run growth. Management decision for geographic diversification, new acquisition, and re-branding of the FLN channel will also help Scripps Networks to maintain its future growth.
Acquisition of a controlling stake in Travel Channel will lift Scripps Networks as the global market leader in lifestyle programming. The company will now have three most powerful and completely distinctive programming categories namely, home, food, and travel. Travel Channel was launched in 1987 and reaches 95 million households. In the U.S., Travel Channel is among the top 15 cable networks for primetime ratings growth in 2009 that can be incorporated into other platforms like Internet, mobile, and social media applications. Travel Channel is a high-margin business. Management is expecting that Travel Channel may generate $200 million revenue in fiscal 2010 and will also improve the overall margin of Scripps Networks.
Scripps Networks has undertaken an initiative to explore international markets. Recently, the company launched its Food Network programs in the U.K through Sky Network. In early 2010, Food Network will be launched in other parts of Europe, Africa, and the Middle East. As a diversification strategy, Scripps Networks has decided to purchase 69% stake in NDTV Group’s lifestyle programming subsidiary, NDTV Lifestyle for a total consideration of $55 million.
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