Martha Stewart Living Omnimedia, Inc. (NYSE:MSO)

JakilaTheHun (99.94) Submitted: 9/4/2009 2:18:20 PM : Start Price: $6.70 MSO Score: +13.62

I'm normally averse to red thumb calls like this (i.e. ones that could backfire in dramatic fashion), but I'm just not seeing what the market is so excited about. Martha Stewart Living has been around quite awhile now and they have not produced any profits of note over the past several years. Martha Stewart's image was tarnished years ago after the insider trading scandal, so it's not like she commands the premiums she once did. Plus, she's 68 years old, so buying in on her name wouldn't make much sense any more --- the only plausible reason to buy in would be based on the underlying fundamentals and growth of the company.

That's where the real problem comes --- this looks like a company with very little direction and it seems to have not-too-much in the pipe either. While it has its fingers in it a lot of industries including publishing, merchandising, and broadcasting; none seem to be doing all that spectacular. The majority of their revenues come from publishing and those revenues have been dwindling over the past few years. Margins appear to be nil in most of their endeavors, leading me to question how they are ever going to turn a profit that justifies the stock price. As mentioned in another pitch by gembree, the K-Mart deal is about to expire, too (and revenues from merchandising seem to be dropping rapidly as well).

Of course, we are in a recession and as things pick up, retail and publishing could pick up, but I'm still not impressed with the historical record of MSO. While they don't have a lot of debt to weight them down, they don't really have much when it comes to net tangible assets (NTAs) either --- NTAs are worth less than a buck per share and the stock sells at a whopping 9.2 Price/NTA ratio. Definitely not a "value stock" here. This stock is priced for growth! And to justify the current share price, one would either have to expect (a) monster growth in revenues, (b) monster growth in profit margins, or (c) earnings of at least 40 cents per share on a yearly basis. I'm not sure what the catalysts that would drive (a) or (b) would be, but (c) doesn't appear to be the case. Nor do free cash flows appear to be any significantly better than earnings.

The company now has two CEOs, as well. There's a reason why you don't see too many dual monarchies at the top of the corporate chain --- they don't tend to work very well. All in all, we seem to have a small-cap company that is structured more like a giant, inefficient conglomerate. Even if the stock price is low by historical standards, it still seems very high compared to net assets and historical profits. And maybe there are growth catalysts that I'm missing, but I'm not sure why these new growth catalysts would perform radically better than any of their other catalysts from the past half-decade.

Tarnished name, minimal assets compared to the stock price, zero margins, unimpressive cash flows --- I just can't see what's to like here. Maybe I'm wrong and they've got something in the tubes that's going to blow the market away, but I just don't know what it could be.