Stock pick: Martha Stewart Living Omnimedia Inc. could produce tidy returns

A new CEO signals a renewed focus on growth

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Chart showing trailing 12-month stock performance for Martha Stewart Living Omnimedia

There are a lot of ways that one can describe Martha Stewart—cook, television personality, editor-in-chief and more—but most of us probably don’t think of her as the founder of a massively successful company. Sure, we know her corporation exists, but the majority if us buy her books and products and not her company’s stock. However, now might be a good time to look past Stewart as a personality and pay attention the company she started in 1997.

Martha Stewart Living Omnimedia (NYSE: MSO), a New York-based media and merchandising company where Stewart is the chief creative officer, has done well over the last 12-months—it’s up 62%—but it’s dropped 26% since February 28. For Michael Kupinski, an analyst at Noble Financial Capital Markets, that dip offers a chance for investors buy what he thinks is a growing, but undervalued, company.

On May 6, the business reported its first quarter results and the numbers were mixed. Revenues were $33 million for the quarter, which is down from $37 million a year earlier. It also registered a diluted earnings per share loss of $0.05, the same as the year prior. But while it may appear that it hasn’t made progress over the last 12 months—and some analysts have said as much—Kupinski thinks this is just the beginning of a turnaround.

In October, the company installed a new CEO and its yearlong lawsuit with Macy’s—over a deal it made with JC Penney—was finally resolved in January. In a May 7 note, Kupinski writes that now that its legal issues have been resolved, the path is clear for retail expansion in the U.S. and abroad.

Even with the lawsuit, its merchandising division did well, with revenues increasing 13.7% year-over-year. “It was solidly profitable,” he writes. He does point out that merchandising could take a bit of a hit in the next quarter—it had to pull some of its products from JC Penney shelves as part of the settlement—but it will rebound as it adds new offerings to stores.

Its media division wasn’t nearly as profitable as merchandising, with publishing revenues falling 20% below last year’s levels. It’s suffering the same fate as most media companies—lower ad buys, ad pages sold at discounted rates, the closing of its Whole Living magazine and Every Day Food’s move from print to digital all impacted revenues.

While publishing will still be a drag on revenues in the future, Kupinski thinks that the company should be able to turn itself around sooner rather than later. Besides management wanting to expand its merchandising division, it has said it wants to find media partners to reduce its publishing exposure and it’s also been reducing overall company costs. Operating expenses of $32 million were 9.8% lower Kupinski’s estimates. Overall, it saw an operating loss of $2.6 million, which is better than last year’s $3.3 million loss.

Near term, investors may be in for a rough ride, but this value stock could be on its way up now that some of its headaches are behind it. It’s currently trading at $4 a share, but Kupinski thinks it can hit $6 over the next 12 months. According to S&P Capital IQ, most analysts have a buy rating on the company and its mean price target is $5.74.

“We believe that the company is on its way toward revenue growth and sustainable earnings,” writes Kupinski. “In our view, management is focused on growing its business, including expanding retail partnerships, both domestically and internationally. While these have been prospects before, it appears that the deck is now cleared for management to focus its attention to this matter.”

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