Does good news for Martha mean it's time to buy?
The MSO comeback shows promise, but it's a long way from justifying its current pricetag.
By Yuval Rosenberg, Fortune

(FORTUNE Magazine) -- Is Martha Stewart back? A recent spate of good tidings emanating from Martha Stewart Living Omnimedia (Charts) has sent its shares up 10 percent, providing a welcome tonic for the beleaguered stock, whose price had tumbled nearly 55 percent in the 18 months after Stewart was released from prison.

In early August a legal cloud hanging over the founder's name lifted when the domestic doyenne agreed to pay $195,000 to settle SEC charges of insider trading stemming from her infamous 2001 sale of ImClone Systems (Charts) stock. The agreement, which bars Stewart from serving as a director of a public company for five years and limits her role as an officer, came two weeks after another good thing for shareholders: a much smaller than expected second-quarter loss, on hefty 47 percent revenue growth. The company also announced plans for its first cash dividend, a special one-time payout of 50 cents a share.

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Martha Stewart

This run of good news earned plaudits from analysts. "We think they have turned the corner," says Standard & Poor's Loran Braverman. In a note to clients, a Credit Suisse team opined, "Management is executing on its strategic plan and the company's financial performance is heading in the right direction."

So is it time to bet on Martha's magic? Not unless you're willing to pay a very rich price. After its recent rise, the stock is trading for a vertigo-inducing 68 times projected 2007 earnings.

The bullish argument for the stock: Profits will climb as ad revenues grow. And under CEO Susan Lyne, revenue will also mount as a result of a slew of licensing deals with partners ranging from Kodak to Macy's to KB Home.

"They have a tremendous number of blue-chip companies wanting to do deals with them," says Jefferies & Co. analyst Robert Routh.

But it seems too soon to bet on that kind of upside, and analysts remain skeptical. Even after the good news, only one of the half-dozen analysts who cover MSO (Routh) rates it a buy. The company is still losing money, after all, and that likely won't change until next year.

"The problem," says independent analyst Dennis McAlpine, "is that you're not going to see recovery in the earnings until at least the third quarter of next year, when they get the new line out for Macy's, and that to me is a pretty long way out."

The Martha Stewart comeback shows promise, but it will need to go a lot further to justify its current pricetag. For now it's a Macy's stock trading at a Nieman Marcus price.  Top of page