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We reaffirm our long-term Neutral recommendation on Scripps Networks Interactive Inc. (SNI - Analyst Report) following its strong third-quarter of 2012 results. Both top and bottom lines beat the Zacks Consensus Estimates. However, stiff competition in both its Lifestyle Media and Interactive Services businesses from alternative providers of similar services remains a major concern for the company.

Scripps Networks is generating solid growth in advertising and affiliate-fee revenue at its flagship Lifestyle Media businesses and higher segment profits. We believe both advertising revenue and affiliate fee revenue will remain healthy in the near future. Further, management has raised its fiscal 2012 financial guidance and anticipates a revenue growth of 10-12%.

Scripps Networks is a pure-play lifestyle cable network consisting of six channels. All these cable channels have loyal audiences, who also view Scripps Networks’ contents in several non-TV platforms.

The Cincinnati, Ohio-based company has benefited from the acquisition of Virgin Media Inc.’s 50% stake in UKTV as a lot of the latter’s channel offerings matches with Scripps Networks. Additionally, acquisition of the controlling stake in the Travel Channel has made Scripps Networks the global market leader in lifestyle programming as a consequence.

In the reported quarter, Scripps Networks improved with respect to several financial metrics compared with the year-ago quarter. Total revenue was up 12.4% and total segment profit was up 3.9%. Affiliate fee revenue was up 15.8% year over year. Advertising revenue was up 9.2% year over year. We believe this trend will continue in the near future. The company entered into a distribution agreement with AT&T Inc. (T - Analyst Report) for its lifestyle networks to be viewed by U-verse network subscribers of AT&T.

Approximately 65% of Scripps Networks’ revenue is derived from marketing and advertising spending of the corporate sector in the U.S. which is sensitive to economic conditions. Deterioration of the U.S. economy could lead to corporate spending cut, which in turn could impact the company’s Lifestyle Media segment.

Furthermore, we remain quite concerned regarding higher costs of operations in 2012 results as projected by management. Scripps Networks estimated a 13-15% increase in programming costs and a 10-12% increase in marketing expenses in 2012, which might suppress its margins.

Scripps Network retains a Zacks #3 Rank, implying a short-term Hold rating.

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