Recommendation No. 1: Scripps Networks Interactive (NYSE: SNI)

“Sell to Open” Scripps Networks Interactive September $60 Call

Option Symbol: SNI120922C60

Limit Order Price: $2.00 or more

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Income generated: $200 per options contract (representing 100 shares of stock)
• 92-day rate of return at current stock price of $56.82: 3.5 percent (14.0 percent annualized)
• Tell your broker:

“I want to sell a covered call against 100 shares of my Scripps Networks Interactive (SNI) stock. Specifically, I want to ‘sell to open’ one September $60 call for a credit of $2.00 per share or more.”

• Remember: You should only sell one call option per 100 shares of stock purchased. The trade can only be done in 100-share increments (100, 200, 300, 400, 500, etc.).

Alternative Trade for Those Who Don’t Already Own Scripps Networks Interactive:

Buy/Write on Scripps Networks Interactive (NYSE: SNI): Buy the Stock and Simultaneously “Sell to Open” the September $60 Call

Option Symbol: SNI120922C60

Limit Order Price: $54.82 or less (stock is at $56.82 and September $60 call is at $2.00)

Directional View for Underlying Stock: Neutral

Personal Finance Portfolio: Growth

• Net cost of buy/write: $5,482 per 100 shares
• 92-day return if stock does not move: 3.5 percent (14.0 percent annualized)
• Brokers vary as to whether they call this trade a “buy/write” or a “covered stock” trade.
• Do the trade simultaneously at a single limit price, if possible. For example, if you want to buy 100 shares of stock, tell your broker:

“I want to do a buy/write trade. Specifically, I want to buy 100 shares of Scripps Networks Interactive (SNI) and ‘sell to open’ one September $60 call for a net debit of $54.82 per share or less.”

• Some brokers require that you buy the stock and sell the call in separate trades. If your broker is one of these, always buy the stock first and sell the call against it second:

Trade No. 1:

“I want to buy 100 shares of Scripps Networks Interactive (SNI) for $56.82 per share or less.”

Trade No. 2:

“I want to sell a covered call against 100 shares of my Scripps Networks Interactive (SNI) stock. Specifically, I want to ‘sell to open’ one September $60 call for a credit of $2.00 per share or more.”

Please note: When doing a buy/write trade in two steps rather than in one simultaneous trade, the important thing is to limit the net cost of the buy/write to $54.82 per share. The specific limit prices of the individual “buy stock” and “sell covered call” trades are just starting points and should be adjusted as needed, keeping the net cost of the overall buy/write in mind.

• Ex-Dividend Date: The stock’s next quarterly ex-dividend date is around August 29th. If the September $60 call is in the money at that time, there is a chance that the call owner will opt to exercise the option early in order to capture the $0.12 quarterly dividend. In such a case, an early roll of the covered call may be warranted. A $0.12 dividend is relatively small, however, so the 23 days of time value remaining between the ex-dividend date and September expiration could easily be more than the dividend and make early exercise unlikely.
• Why the September $60 Strike?: Last month, Personal Finance lead advisor Elliott Gue boosted the “buy below” target from $55 to $60. No doubt about it, cable viewers love watching the Food Network and HGTV. Scripps is performing very well and selling the $60 call allows investors to benefit from an additional 5.6 percent gain in the stock from its current $56.82 level. But the fact remains that $60 is Elliott’s current “buy below” level so there may not be much upside above $60–at least in the short term. During the company’s May conference call, Scripps CFO Joseph NeCastro affirmed earnings guidance for the full year, but refused to raise guidance. That hesitance could just be conservatism, but it also could mean that further upside surprises may be taking a pause, at least through September expiration.

Price Adjustments Regarding This Trade

Stock prices are currently fluctuating and option prices fluctuate with them. Consequently, the limit prices recommended in this trade alert may no longer be immediately fillable by the time the alert has been released. The alert is valid for seven trading days, so be patient and place your limit orders as “good ‘til canceled” (GTC) for seven days.

Investment Rationale for Underlying Stock:

Scripps Networks Interactive (NYSE: SNI) boasts a stable of cable television networks that includes HGTV, Food Network, Travel Channel and DIY Network, all of which feature lifestyle programming.

TV is a big part of Scripps’ business model, but it’s not wedded to the boob tube. Companion websites for all of its networks are the foundation of its growing Internet presence, while the company also provides streaming video content for smartphones.

Although Scripps has benefited from higher affiliate fees as contracts with pay-television providers come up for renewal, significant increases in advertising sales continue to contribute meaningfully to overall revenue growth.

Scripps has become popular with advertisers because its lifestyle programming tends to attract affluent viewers with high disposable incomes. In addition, advertisers can get favorable rates by bundling their ad buys to include both airtime and space on Scripps’ websites.

The company reported first-quarter earnings per share of $0.73, blowing away consensus expectations of $0.61 per share.

Management was upbeat during the conference call, noting that US advertising spending remains robust and prices are on the rise.

Scatter prices–the cost of taking out advertisements on an ad hoc basis–were up by percentages in the high single digits in the first quarter of 2012 compared to the same period in 2011.

In addition, strong ratings for Scripps’ core networks allowed the firm to demand higher affiliate fees from cable providers. In the first quarter, affiliate fee revenues soared 16 percent to $168 million from year-ago levels. Meanwhile, ad revenue grew 10 percent to $356 million. Although Scripps operates with the cable channel model of receiving fees for content, its advertising revenue still comprised 67 percent of total revenue.

Food Network’s revenue grew 14 percent to $199 million during the first quarter, contributing 37 percent of Scripps Networks Interactive’s consolidated sales. The DIY Network’s focus on do-it-yourself home repairs resonated with value-conscious consumers. The channel’s 18 percent year-over-year growth in revenue was the second-strongest performance among the company’s properties, though it accounted for only 5 percent of the company’s total sales.

The company also stands to profit from the media growth occurring internationally, especially in emerging markets where many countries are rebuilding their telecommunications structures to meet the demands of a growing middle class.

The rise of Asia in particular offers opportunities to create lifestyle networks tailored to local tastes. These media niches remain largely untapped.

Scripps Networks Interactive is rated as a buy below 60 in the Personal Finance Growth Portfolio.