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Scripps Networks Remains Neutral

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We reaffirm our long-term Neutral recommendation on Scripps Networks Interactive Inc. . The company reported robust financial results for first-quarter 2013, easily beating the Zacks Consensus Estimate.

Why Kept at Neutral?

Scripps Networks is generating healthy growth in Advertising and Affiliate-fee revenues at its flagship Lifestyle Media businesses and higher segment profits. We believe that both Advertising revenues and Affiliate fee revenues will remain strong in the near future. The company is expected to benefit as the U.S. housing sector is slowly coming out of its prolonged downtrend.

Scripps Networkshas entered into a content licensing deal with Inc. (AMZN - Free Report) . As per the deal, the past episodes of Scripps Networks’ popular TV channels will be available on Amazon’s subscription-based video streaming service – Prime Instant Video. This is Scripps Networks’ first online-only subscription distribution deal.

Additionally, the company has also entered into an agreement with Time Warner Cable Inc. through which Time Warner Cable’s subscribers will be able to watch several Scripps Networks’ channels. Food Network channel is broadcasted in several parts of Europe, Africa, and the Middle East through Chellomedia, a division of  Liberty Global Inc. (LBTYA - Free Report) .  

Nevertheless, we remain quite concerned regarding higher costs of operations in 2013 as projected by management. Scripps Networks estimated a 12-14% increase in programming costs and a 7-9% increase in marketing expenses in 2013. Compared to this, revenues are expected to rise by a mere 7-9%.

Meanwhile, the stock price has soared over 31% in the last year and is currently trading at the high-end of its 52-week price range. We believe that Scripps Networks is currently fairly valued.

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