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Extra
Is Stewart's stock free at last?
As Martha Stewart puts prison behind her, the stock of her namesake company is also riding high -- but analysts doubt the run can be sustained.
By Kim Khan
Martha Stewart exited prison much richer than when she entered.
During Stewart's five months behind bars -- her penalty for being convicted of lying to federal prosecutors -- Stewart's net worth jumped by about $480 million, as shares of Martha Stewart Living Omnimedia (MSO, news, msgs) soared.
Now investors want to know whether the stock's run-up is at all justified, and whether a freed Martha (who faces yet another five months of house arrest) can help continue the stock's rise. Shares rose 6% at the market open today, just hours after the founder left prison and returned home, but settled back down in later trading. (See Market Dispatches for the latest news).
Analysts are baffled by the stock, saying there is almost no hope the company can grow earnings fast enough to support the current stock price. But even the biggest bears admit that there's little chance of a sell-off in coming weeks.
Star power vs. business fundamentals
There are two forces tugging at shares of Martha Stewart Living. First, there is the founder herself. Her image, her brand and her over-the-top media exposure all pull people toward the stock. Many investors like to buy what they know, and a company continually in the spotlight can gather a lot of supporters.
Then there's a stock price that analysts see as almost offensively high when compared to the business fundamentals.
The company's share price has doubled since Stewart began her five-month stint at the federal women's prison in Alderson, W.Va., a.k.a. "Camp Cupcake."
The stock is up nearly 300% since hitting a post-conviction low of $8.55 on May 19, 2004, two months after her conviction. The shares haven't seen these levels since August 2000. Lately, however, some profit taking has set in, and the shares are down about 10% from their 52-week high of $37.45, reached on Feb. 23.
A stock price in 'la-la land'
Red ink stains the pages of Martha Stewart Living Omnimedia's recently released fourth-quarter results. The company reported a fourth-quarter loss of $7.33 million, or 15 cents per share, compared to a profit of $2.37 million, or 5 cents per share, in the same quarter a year ago.
More on Martha
The fourth-quarter's loss was narrower than the 17 cents-a-share loss forecast by analysts surveyed by Reuters. But MSO also predicted a loss of 35 cents per share in the current quarter, much wider than the Reuters Estimates consensus of 20 cents per share.
"It's difficult to see anything that backs it up fundamentally," says Burt Flickinger III, managing partner at Strategic Resource Group, of the stock's recent rise. "The subscription base is down dramatically. Ad pages are down dramatically."
The plummeting earnings power has caused much consternation among research analysts, who haven't minced words in recent notes:- "This stock price (is) still in la-la land," said Credit Suisse First Boston analyst William Drewry. "The stock performance remains disengaged from the company's fundamentals."
- "Even before the stock's most-recent rally, MSO shares seemed to be embedding a level of earnings power that we had trouble comprehending," wrote Michael Meltz, an analyst at Bear Stearns.
- "We continue to believe that Martha Stewart Living Omnimedia shares are tremendously overvalued, believing that the value of the existing business is below $10 per share, based on future expectations for the publishing division that are more optimistic than our 2006 forecast," wrote William Blair analyst Alissa Goldwasser.
- "It's trading at 75 times its peak earnings now and over 50 times our 2006 estimates," Gary McDaniel, equity analyst at Standard & Poor's, told CNBC's "Squawk Box." "How that valuation can be estimated by growth potential, I really can't understand."
Is a reality show worth $20 per share?
So if there's nothing backing up the share price, how does the stock keep climbing? Some investors believe that, having built an empire, Martha Stewart can come back and restore it to glory.
The company's plan is to put Stewart in front of the public as much as possible. She will have a new one-hour show devoted to cooking and crafts, with a live audience, to be syndicated by NBC Universal. She also will take her turn in prime time as star of a new version of the reality show "The Apprentice." (NBC is the sister network of CNBC.)
Only the syndicated show will contribute directly to her company, but it should help boost TV revenues that were down to $1.1 million in the last three months of 2004. "The Apprentice" will certainly boost Stewart's profile if it garners ratings as strong as the Donald Trump version.
But it's debatable whether the shows can boost the company's bottom line. And it's unclear how the public will embrace Stewart's reality show, considering how audiences are beginning to burn out on the Trump show, Flickinger says. Trump's version, too, is a "little bit of a sexier show," because of the Donald's background in gambling, casinos and association with celebrities.
"Cooking and homemaking tend to be less glamorous," Flickinger says.
S&P's McDaniel believes the reality show "is a great opportunity to turn around her image" and "advertisers will come back to the magazines once her image has been rehabilitated." But Stewart faces a difficult question in how she will appear on the show.
The Martha conundrum
"She can either be tough like Trump is and get good ratings, but that's probably bad for her brand perception," McDaniel said. "On the other hand she can be warm and soft and cuddly and get horrible ratings, but be good for her brand."
Aside from being the face of the company, it's also unclear how much day-to-day responsibility Stewart will have. She still faces civil charges of insider trading by the Securities and Exchange Commission. That could prevent her from returning as chief executive or performing the duties of a CEO in another capacity.
Media executive Susan Lyne, who championed TV hits "Lost" and "Desperate Housewives" during her time at ABC, was named president and CEO of the company in November.
Nothing in sight to spur selling
Unless something dramatic occurs in the next few months, like a change in the reality show plan, there seems little reason for shares to tumble. Investors gave the company a free financial pass in the fourth and, apparently, current quarter and will probably take financial results with a grain of salt until Stewart's reality show gets under way.
"We maintain our 'underperform' rating, although we believe that the shares could continue to hold their value or appreciate through the fall, fueled by Martha Stewart's release from prison in March and the debut of the daily syndicated and primetime reality shows in fall 2005," Goldwasser wrote in a recent note.
Another force keeping the shares afloat is the huge amount of short-selling of the stock, analysts said. The short interest in the stock is about 80% of the current float and about four times the average daily volume, according to ShortSqueeze. Any encouraging news for Martha Stewart Living could lead to a wave of short sellers trying to buy stock and limit their losses, pushing the price higher.
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