Sell Block: Martha's Marvelous Again

This week’s Sell Block was more about release than incarceration. And the segment’s theme might be apropos given that the topic was Martha Stewart.

At first glance, Martha Stewart Omnimedia offers investors what look like a “parade of horribles,” Cramer called it. Five, specifically.

  • Ad revenues for magazines are declining industrywide.
  • Susan Lyne, the former CEO, left.
  • MSO has a high expense structure.
  • The merchandising division will lose K-Mart as a sponsor in 2010.
  • Martha herself is still too big a part of the company.

But Cramer, ever the contrarian, sees plenty of positive where others see negative.

Under Susan Lyne’s leadership the company never moved beyond publishing, and the stock dropped 50% in the past year. Since she left, Chairman Charles Koppelman, a key figure behind the building of EMI music, has stepped up. Co-CEO Robin Marino has 30 years in retail and helped run Kate Spade. The other chief executive, Wenda Harris Millard has strong publishing experience both online and off. (She was at Yahoo! in the beginning.) Together, these three are just the type of management MSO needs right now.

Then there’s Martha. People say her involvement is a bad thing, but Cramer said Martha’s on a mission, especially after her short prison term. Her legacy’s at stake, and he’s betting she wants to show the world that MSO is better than a $7 stock.

The future for Martha Stewart Omnimedia as Cramer sees it is in worldwide merchandising. Yes, they’re losing K-Mart. But MSO just picked up Chef Emeril Legasse’s business. There’s also an upcoming crafts line at Wal-Mart and a new deal with Macy’s even the housing line with KB is doing well despite the market downturn.

Cramer said the Martha brand is bigger overseas, and he’s expecting a roll out of new stores to help fuel this company’s growth.

MSO’s in the middle of a major transition from publishing to merchandising, and that’s the play here. Granted, it’s still a full 17 months between now and the separation from K-Mart, but those overseas sales should see the company through. So will the positive cash flow. While other major publishing companies stagger through this new age of technology, Martha Stewart Omnimedia is proving it will survive.

MSO reports next week, but that’s not why Cramer’s recommending it. Expectations are low and the stock’s been downgraded twice this past quarter. But, if anything, the universal hatred should signal a bottom, Cramer said.

The bottom line: Don’t pay up for the stock. Buy in small increments. Use limit orders. If you shell out more than $8 and change for MSO, you could regret it.

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