Over the last six months, E.W. Scripps’s shares have sunk to $3.28, producing a disappointing 16.2% loss - a stark contrast to the S&P 500’s 12% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy E.W. Scripps, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think E.W. Scripps Will Underperform?
Despite the more favorable entry price, we’re passing on E.W. Scripps for now. Here are three reasons why there are better opportunities than SSP, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, E.W. Scripps struggled to consistently increase demand as its $2.09 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, E.W. Scripps’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
E.W. Scripps’s $2.51 billion of debt exceeds the $13.05 million of cash on its balance sheet. Furthermore, its 9× net-debt-to-EBITDA ratio (based on its EBITDA of $288.8 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. E.W. Scripps could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope E.W. Scripps can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of E.W. Scripps, we’re out. After the recent drawdown, the stock trades at 326× forward P/E (or $3.28 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
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