Martha Shares Overcooked

Shares of Martha Stewart Living Omnimedia (MSO Quote) have been held aloft by speculation that it will be the next target of the leveraged buyout spree that has gripped corporate America.

That deal, however, may never materialize. The company's CEO, Susan Lyne, tells TheStreet.com that a buyout is "unlikely."

Where, then, is the stock headed?

It has already dropped 14% this year as some of the takeover speculation has died down, and given the upcoming decline in revenue from the company's merchandising deal with Sears Holdings' (SHLD Quote) Kmart chain, it could have further to fall.

Ivan Feinseth, director of research with Matrix USA, holds a sell rating on the stock. With the stock trading around $18.78, roughly 67 times Wall Street's earnings estimates through 2007, he calls the market's current valuation "insane" and believes shares will drop to $12.

"They're losing money," Feinseth says. "They're free cash flow negative. They don't earn their cost of capital. So, why would anyone buy this thing at this price, unless they're going to sell it short?"

For most people, any mention of Martha Stewart gives rise to images of the domestic diva, her much-publicized legal travails, her cooking shows and her "good things." But when it comes to the operating profits at her company, Martha Stewart is really about merchandising -- and right now, that means Kmart.