On the right channel
Martha Stewart Living Omnimedia (US: MSO) has been a standout performer during the relatively short time it has been held in the Fat Prophets Portfolio. Recently, the company's share price has shot up to highs not experienced since 2000. We believe three developments, a major retail merger in the US, the development of a new television programme and an anticipated return of advertisers, are behind this surge in value.
| "We expect that the new programme will have positive effects on MSO that extend beyond the Television unit, as Martha is reintroduced to her loyal core of customers as well as new viewers" |
Martha Stewart's merchandising division has been the only one of four units to be profitable this year, however, sales have been lower than last year. Therefore news of the US$11 billion deal between Kmart and another major US retailer Sears, Roebuck & Co, raised expectations that turnover at the division would receive a significant boost. The new company, Sears Holdings, is expected to greatly expand the distribution of Martha Stewart's signature products. Significantly the new company will give shoppers a low cost, mall based alternative to rival retail heavyweights Wal-Mart and Target.
There are questions regarding the specific impact of the merger on the fortunes of Martha Stewart Living. These questions revolve around issues such as the timing and magnitude of new sales and the impact of closing redundant stores. While we will be watching these events with interest, we believe the market has reacted astutely, and that overall sales will be boosted. Previously we were optimistic regarding merchandising turnover in 2005, this merger has added significant weight to this view.
The second major development has been the announcement made this month by MSO and NBC Universal, a major US television network. The two companies have agreed a multi-year deal for a new daily programme starring Martha Stewart beginning in the fall of 2005. Mark Burnett, the reality TV guru brought in earlier this year to revive the company's Television division, will be the executive producer of the nationally syndicated programme. The hour-long show will focus on consumer lifestyles and will include occasional celebrity guests and audience interaction. In our opinion, this new programme will have positive effects on MSO that extend beyond the Television unit, as Martha is reintroduced to her loyal core of customers as well as new viewers.
Mark Burnett's second task, that of developing a prime time programme featuring Stewart, was not discussed in the announcement of the new daytime series. However, we are encouraged by the recent agreement, and are confident that the Television unit can secure further deals. We believe the division will be a key contributor to the resurrection of the company's fortunes.
Another encouraging development at MSO was the result of a September survey by WPP Group's Mediaedge:cia. According to the survey, 70 percent of Martha Stewart Living subscribers plan to renew their magazine subscriptions. This renewal rate is 19 percent better than the industry norm. We believe the renewal findings mark a significant turnaround from when the scandal surrounding Stewart was at its highest and magazine renewals fell 10 percent below the industry average. With strong subscription renewals returning to the magazine, we are optimistic that advertisers will return as the company has suggested in the second quarter of 2005 when Stewart is also released from prison.
MSO has also announced that Susan Lyne will be replacing Sharon Patrick as CEO and President. Ms Lyne has been serving as a director of MSO since June 2004 and brings with her 25 years of valuable entertainment industry experience. Prior to a management reshuffling this spring at Walt Disney, Ms Lyne was the head of ABC Entertainment in the US. Previous to this Ms Lyne was managing editor of The Village Voice, a weekly newspaper in New York. We are heartened by the experience Ms Lyne brings to the company as the Martha Stewart Living magazine and new television ventures feature prominently in future growth plans.
MSO has been a fantastic performer during the short period it has been held in the Fat Prophets Portfolio. After a brief consolidation following our last review (FAT58), MSO has regained upward momentum. The latest gains took the shares to US$32.67 today, their highest level in four years.
Given that MSO has rallied by as much as 190 percent over the past three months, the prospect of some near term consolidation has increased. We are also mindful of the rapid increase in value occurring while there are expectations of MSO posting a loss this year. Therefore we will be keeping a close eye on MSO for any signs of a significant correction unfolding. However with the positive developments surrounding the company and an upward trend still firmly intact, we believe the best strategy is to maintain our holding. Accordingly, MSO remains firmly held in the Fat Prophets Portfolio.
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As at the date at the top of this page, Directors and/or associates of the Fat Prophets Group of Companies currently hold positions in Avexa (AVX), Evolution (EVN), Cerro Resources (CJO), Energy Action (EAX), Mt Isa Metals (MET), Telstra (TLS), Woodside Petroleum (WPL), ANZ (ANZ), Austar (AUN), Carsales.com (CRZ), Gold Road (GOR), IOOF Holdings (IFL), Magellan Financial group (MFG), Paladin Energy (PDN), QBE Insurance (QBE), Platinum Australia (PLA), Datasquirt (DSQ), Hodges Resources (HDG), Newcrest Mining (NCM), Oil Search (OSH), Zambezi Resources (ZRL), Auroa Minerals (ARM), Billabong (BBG), Pioneer Resources (PIO), Runge (RUL), Westpac (WBC). These may change without notice and should not be taken as recommendations.