What a brutal six months it’s been for E.W. Scripps. The stock has dropped 38.7% and now trades at $1.82, rattling many shareholders. This may have investors wondering how to approach the situation.

Is there a buying opportunity in E.W. Scripps, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why SSP doesn't excite us and a stock we'd rather own.

Why Do We Think E.W. Scripps Will Underperform?

Founded as a chain of daily newspapers, E.W. Scripps (NASDAQ:SSP) is a diversified media enterprise operating a range of local television stations, national networks, and digital media platforms.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, E.W. Scripps grew its sales at a 12.8% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our benchmark for the consumer discretionary sector, which enjoys a number of secular tailwinds.

2. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, E.W. Scripps’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

E.W. Scripps’s $2.75 billion of debt exceeds the $34.64 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $486.3 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. E.W. Scripps could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope E.W. Scripps can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

E.W. Scripps doesn’t pass our quality test. Following the recent decline, the stock trades at 0.3× forward EV-to-EBITDA (or $1.82 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Like More Than E.W. Scripps

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