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Stock Analyst Update

Negative Growth Tarnishes Gemstar's Appeal

Reliance on declining TV Guide revenue bodes poorly for the stock.


What Happened?
Gemstar-TV Guide (GMST) on Monday reported that pro-forma revenue for the September quarter was $337.7 million, down less than 1% from the prior period. Despite the slight decrease in revenue, the company delivered a 30% increase in EBITDA (earnings before interest, taxes, depreciation, and amortization), a proxy for cash flow, to $99 million thanks to cost controls. Interactive TV businesses performed well while the TV Guide print publishing and investment businesses, which include holdings in television-related entities, experienced negative revenue growth.

What It Means for Investors
We continue to believe that Gemstar is an expensive stock carrying a lot of downside risk, especially given the negative top-line growth rate. In fact, before the merger of Gemstar and TV Guide, no matter what metric was used, Gemstar was expensive--it traded at 877 times cash flow, 149 times earnings, and 92 times sales compared with the average for the S&P 500 index of 27 times cash flow, 30 times earnings, and 3 times sales. 

Richard Wilson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.