The Unsinkable Martha Stewart

Michael Brush Columnist, MSN Money

Among the loser stocks plumbing 52-week lows, Martha Stewart Living Omnimedia stands out as a bargain that could double and then some, writes Michael Brush of MSN Money.

Domestic diva, CEO, TV host, magazine icon, prisoner number 55170-054—Martha Stewart sports a résumé that's more variegated than the colors that pop up in the flower beds of her Bedford, N.Y., estate.

Now approaching 70, Stewart—once nicknamed "M. Diddy" by fellow inmates, and known to millions of fans simply as Martha—is still reinventing herself. Yet her latest career moves have confounded many fans, while critics and investors see signs in the latest round of makeovers that Stewart and her company, Martha Stewart Living Omnimedia (MSO) should be put out to compost.

Given all that Stewart has survived, though, these skeptics shouldn't count her out just yet. Stewart and her company have really just been working through important transitions—ones that should bring you a double or more in the stock if you buy shares now.

Before I bring you the good news, let's first take a look at what critics say is wrong with Stewart and her company.

First, she moved her "Martha Stewart Show" last year from a major network, NBC, to the less popular and much stodgier Hallmark Channel. This is a sign she's old-fashioned and unable to connect with a younger generation, according to naysayers.

Stewart also ended her pact with Kmart last year after pairing with Home Depot (HD), which seems an unlikely partnership, say skeptics. After all, do home repair buffs think "Martha Stewart" when they're shopping for two-by-fours?

If you glance at the surface trends in sales and earnings, things do appear grim. MSO sales and earnings declined again in the fourth quarter. Sales were down last year and are well off 2007 highs. In reaction, her company's shares, at around $3.75, are near their 52-week low.

But because the 52-week low list can be a great shopping list for contrarian investors like myself, I recently decided to grab a trowel and do some digging.

Here is the key takeaway: Trading for the modest $177 million enterprise value the market puts on Stewart's media empire once net cash is subtracted, her company and brand are going for much less than they would be worth in a buyout. That tells me there's limited downside for anyone who buys the stock now.

On the other hand, the upside potential is huge, and recent moves are likely to pay off big time.

Noble Financial Capital Markets media and entertainment analyst Michael Kupinski thinks the assets inside Martha Stewart's company—the magazines, the brand, the Web sites, and the earnings potential in putting her name on retail goods—together are worth $12 a share. He has a $10 price target on her stock.

As for the move from NBC to Hallmark, it’s a sweet deal likely to make Stewart's broadcasting division profitable—not bad for what some might describe as a marketing effort for her merchandising.

Which matters, because Martha Stewart Living Omnimedia is turning into a merchandising machine.

NEXT: So Long, Kmart

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So Long, Kmart
The key is that Stewart broke free last year from a highly restrictive merchandising agreement with Kmart, a division of Sears (SHLD). The retailer regularly blocked promising product ideas, say analysts. Plus the deal kept Stewart from putting her name on merchandise internationally.

The potential here is vast. In her merchandising business, Stewart collects a royalty—I'm going to guess it's 3.5% or higher—for putting her name on goods she helps design for high-profile retailers like Home Depot and Macy's (M). But the retailers take all the risks. These deals let Stewart cash in on a good name and loyal following built up over three decades.

Stewart has managed to keep a strong connection with her core audience of college-educated women ages 24 to 54—a key demographic for advertisers because it's the group that controls most household spending.

There are also clear signs that Stewart remains relevant in the app age. On its release, the first digital version of her magazine zipped up to become the No. 1 app in the lifestyle section at Apple (AAPL). The "Martha Stewart Makes Cookies" baking app became the top-grossing app in the same section within hours of its launch late last year.

Unfortunately, no discussion of Martha Stewart Living Omnimedia as an investment is complete without at least an attempt to address what might happen to the company if Stewart leaves the scene. Few companies are identified so closely with an individual. And not to be crass, but while Stewart is a well-known workaholic who it seems might go on forever, illnesses and other setbacks do happen.

Stewart's departure would no doubt be a shock for the stock, as would losing her TV presence. But with its brand strength, the company might well recover and continue to do well, say analysts.

Not that anyone's counting Stewart's days just yet. Staying power, after all, apparently runs in the family. Her mother lived to 93.

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