E.W. Scripps’s 16.3% return over the past six months has outpaced the S&P 500 by 6.5%, and its stock price has climbed to $3.98 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy E.W. Scripps, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

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

We’re glad investors have benefited from the price increase, but we don't have much confidence in E.W. Scripps. Here are three reasons why SSP doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, E.W. Scripps’s sales grew at a weak 6.5% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.

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. On average, E.W. Scripps’s ROIC decreased by 4 percentage points annually 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 $2.65 billion of debt exceeds the $54.67 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $474.2 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

We cheer for all companies serving everyday consumers, but in the case of E.W. Scripps, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 7.8× forward EV-to-EBITDA (or $3.98 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. Let us point you toward the most dominant software business in the world.

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