BUSINESSWEEK ONLINE : JANUARY 17, 2000 ISSUE
COVER STORY Investors Aren't So Sure about Stewart's Style Down from its hot IPO, the company hasn't really caught Wall Street's fancy yet As you'd expect from a company run by the queen of gracious living, Martha Stewart Living Omnimedia (MSO) made a stunning debut on the New York Stock Exchange on Oct. 19. The shares quickly soared to $50 from an initial public offering price of $18. But -- as hot IPOs and other debutantes often do -- it has since suffered a post-party letdown. Mostly trading in the mid-twenties for the past two months, the stock stumbled to a low of 20 1/16, on Dec. 29. MSO did get a lift the first week of the year when both Bear Stearns and Banc of America Securities raised their recommendation to a "buy." In a Jan. 5 report, Banc of America analyst Shelly J. Hale cited strong November Web traffic, a new partnership with Kmart's bluelight.com e-commerce venture, and recent stock-price weakness as reasons for the upgrade. The reports pushed the stock to the high-20s but didn't power huge gains, perhaps in part because both firms participated in the stock's underwriting and thus could be expected to come out with positive research. MSO shares closed Jan. 6 at 26 9/16. Part of the problem is that, as popular as Martha is with fans who are tuned into her style of decorating, cooking, and gardening, her company isn't really in sync with investors. At its core, MSO is in media and publishing rather than a fast-growth area like high-tech or the Internet. Clearly, the company has huge potential to bring Martha's brand to the Net -- and got a $25 million capital investment from Internet venture capital firm Kleiner, Perkins, Caufield & Byers in the third quarter of 1999 to help develop it. But the company's publishing, television, and merchandising generate the great bulk of revenues ($43 million out of a total $50 million in the last quarter). BAD TIMING. Investors recognize that MSO isn't an e-tailing pure-play, says Tom Taulli, senior analyst at Internet.com and author of Investing in IPOs. "It has a strong association with the brick-and-mortar world. That will keep a lid on a stock like this." Plus, the company was a little bit late to the Internet and is only beginning to build up a robust site now -- just when investors are far less enamored of e-commerce than they were a year ago. Amazon.com's Jan. 5 warning that even a 150% gain in fourth-quarter sales over the prior year won't bring it any closer to profitability doesn't spur enthusiasm for the Internet retailers. Martha Stewart Omnimedia is subject to the same negative financial dynamics. Although the company has been strongly profitable in the last three quarters, Hale expects it to only break even in the fourth quarter on $64 million in revenues, thanks to a $9 million operating loss in its Internet business. Hardly pounding the table on the stock, she set a 12-month price target of $32. Also holding back the stock: Investors are wary of the company's reliance on Martha Stewart herself. She could die, get caught in a scandal (which doesn't seem very likely), or her fans might simply get tired of her. "It's important to make Martha Stewart into a brand that has longevity," says Kevin R. Gruneich, an analyst at Bear Stearns & Co. Although Stewart is known to be an exacting manager, Gruneich is quick to point out that some of her top people have been with her for nearly 10 years. Depth of talent in the organization is key to her long-term success, notes Merrill Lynch analyst Lauren Rich Fine. "A REAL BUSINESS." While being so reliant on Stewart may add some risk to the stock, she is also the company's greatest asset. Ranked as one of the top 25 managers in American business in the Jan. 10 issue of Business Week, her vision for creating high-quality content, spreading it across different media, and ultimately to branded merchandise is driving the company's growth. "She knows how to run a business -- a real business," says Taulli. While it may not be an Internet play du jour, the stock may make sense for an investor who wants some exposure to dot.coms but doesn't want to risk getting caught in an Internet stock meltdown. "While I don't think we would see spectacular zoom on upside, there is a floor there too," points out Taulli. "As the market craters, you may not see the same kind of downside you might in other companies." Relative to other media names, Martha Stewart Living Omnimedia certainly has a lot of growth still ahead of it. Formed in 1997, it's still in an early stage of development. "What they've laid down in the last two years is phenomenal," says Gruneich. For investors who admire Stewart and her brand, picking up a few shares to hold long-term, might prove (to borrow her tag line), a very good thing. By Amey Stone in New York, with Diane Brady in Westport, Conn. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Martha Inc. COVER IMAGE: Martha Inc. CHART: Martha Stewart Inc... CHART: ...Rakes in Big Sales Gains...But Spending Curbs Profits TABLE: Martha's World TABLE: Mini Marthas A Picture-Perfect Target ONLINE ORIGINAL: How Margaret Roach Makes Martha's Garden Grow ONLINE ORIGINAL: Investors Aren't So Sure about Stewart's Style INTERACT E-Mail to Business Week Online

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