Avoid Martha Stewart, the company

By Robert Walberg

There is a risk anytime a company is closely associated with a single person.

Yet based on its latest earnings report, Martha Stewart Living Omnimedia (MSO, news, msgs) seems to have overcome the damage to its namesake's image. Martha Stewart has managed to bounce back from her legal woes, and her magazine, radio gig and television show are experiencing respectable growth. The main worry regarding the company is that it continues to rely too heavily on her name.

Let's start with the positives. The company's fourth-quarter earnings of $16.21 million, or 31 cents per share, blew past Wall Street estimates of 25 cents by a whopping 24%. Sales grew by 14.7% to $97.04 million, beating the consensus estimate by 2%.

Impressive growth

Equally as impressive was the fact that each of the company's four divisions grew. Publishing, which accounts for 44% of revenue, jumped 5% due to an increase in high-margin advertising. Ad pages for the new Everyday Food magazine jumped 36%, helping the publication reach profitability in 2006, a full year ahead of schedule, management said.

• Video: Martha Stewart earnings

The broadcasting unit posted sales growth of 21.8% -- not bad considering the concerns over Martha Stewart's image just a short while ago. Given that the company's nationally syndicated TV show, "The Martha Stewart Show," is being renewed in more than 85% of markets, this group should continue to post solid growth. Results will also continue to get a lift from Stewart's show on Sirius Satellite Radio (SIRI, news, msgs).

Another bright spot for the company is its merchandising business, which accounted for 36% of fourth-quarter sales. Not only did revenue grow 25% year over year, but the unit promises better results ahead.

The Martha Stewart Collection of home products at Macy's (a division of Federated Department Stores (FD, news, msgs)), which is due to launch late summer, and the Martha Stewart Crafts line to be unveiled at over 900 Michaels stores in May should help. The company also plans to expand its paint business into Lowe's (LOW, news, msgs) later this year. These efforts should give a nice boost to the bottom line in the quarters and years to come.

New source of business

The company also continues to invest in its Internet presence. Revenue for the unit grew 24% yet still totaled a mere $5.4 million, or less than 6% of total sales. After dumping millions into new infrastructure, the company plans to relaunch its Web site in the next couple of months. It's encouraging to see strong double-digit growth. Yet given Martha Stewart's primary audience, it's unlikely that the Web business will ever provide a significant source of revenue.

Management forecast full-year 2007 revenue of $330 million to $340 million, with net income of between $5.5 million and $8.5 million -- more or less in line with current Wall Street estimates. There's speculation that the company is in play to be taken over. Yet management noted that it won't buy back more shares or provide a special dividend.

Though anything is possible, I doubt that any firm would want to pay the kind of premium necessary to acquire the stock, especially when the company remains so closely tied to the success and image of one woman.

Martha Stewart Living trades about 55 times estimated earnings, 3.5 times trailing sales and more than 8 times book value (trailing 12-month earnings). Though I'm happy for Martha Stewart that she has managed to redeem her reputation, I wouldn't be happy to pay those kinds of prices to own shares in the company that bears her name.

At the time of publication, Robert Walberg did not own or control shares of any company mentioned in this article.