Martha Stewart Perks Up

The publishing company's shares jump on a stronger-than-expected quarter and buyout rumors.
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Updated from 1:54 p.m. EST

Shares of

Martha Stewart Living Omnimedia

(MSO)

were back on the move Tuesday, as investors wagered on the comeback of its domestic diva founder and a rumored deal to take her company private.

The New York-based media company reported narrowed third-quarter losses Tuesday on stronger-than-expected advertising revenue, and the company nudged up its revenue forecast for the fourth quarter. Shares closed up $1.02, or 5%, to $21.20.

The stock has been on a roller coaster ride for the past four years following the the highly publicized legal troubles of founder Martha Stewart that began in 2002. After climbing to the $40 mark last year on hopes that Stewart's version of the NBC reality show

The Apprentice

would be a smash hit, the stock ultimately sank back below $20 after the TV show flopped.

Now, with its namesake's legal troubles over and advertising revenue flowing back in, Martha Stewart Living's stock is up 50% in the last three months. The action went into overdrive when rumors circulated that a private equity group may take the company private.

Analysts are still mostly skeptical of its high valuation -- the stock is trading at about 81 times forward earnings estimates through 2007 -- but at least one is willing to give Martha the benefit of the doubt.

"They've got a number of new deals in the works and more in the pipeline that haven't contributed any revenue yet, and the company is already showing tremendous growth," says Jefferies analyst Robert Routh. "Some people say it's expensive, but they're looking at the stock the wrong way. You're buying the future, not the past. This is an established brand with real assets and great management. The growth potential is huge right now."

Martha Stewart Living's stronger third-quarter results Tuesday were driven by improvements from its magazine publishing unit -- an industry that is not exactly thriving in today's economy -- and CEO Susan Lyne said the company will continue to outperform.

"We are anticipating good, double-digit growth at Martha Stewart Living next year and wildly outperforming the market as a whole," said Lyne on the company's earnings conference call.

Meanwhile, the company's chief financial officer, Howard Hochhauser, told analysts that a number of capital investments the company has made recently should start paying off in 2007, setting the stage for a big year.

The company will soon launch a new line of paints with

Lowe's

(LOW) - Get Report

, the home improvement chain, called Martha Stewart Paints. Lyne said on the call that she's interested in expanding the company's relationship with Lowe's and considering other merchandising relationships.

"We want to be where people shop," Lyne said."It's one of the things that has come back to us over and over again in our research that when people are not buying our products, it's because they say they're not available where they shop. So, yes, rolling out a larger presence at Lowe's is certainly in our sights."

The company is also investing in its Internet presence, including relationships with

Google

(GOOG) - Get Report

and

Yahoo!

(YHOO)

to drive traffic.

And it could acquire new media properties. Lyne said on the conference call that buying new assets is "not something we think we need at this point, but if the opportunity is right, we will do it."

For its third quarter, the company recorded a loss of $25.2 million, or 49 cents a share, compared with a year-earlier loss of $26.1 million, or 51 cents a share.

That measure includes a litigation reserve related to a securities class action brought against Stewart in connection with her securities fraud trial. Excluding the reserve, the company lost 13 cents a share in the quarter.

On that basis, analysts on Wall Street were expecting a wider loss of 18 cents a share, according to Thomson First Call.

The company's total revenue rose 48% to $61.05 million from $41.32 million in the year-ago period. That also beat analysts' expectations for revenue of $56 million.

Its magazine publishing unit posted a 32% increase in revenue, led by a 39% increase in ad pages at

Martha Stewart Living

and an 81% increase in pages at

Everyday Food

.

Revenue from its broadcasting business more than tripled thanks to

The Martha Stewart Show

, the company's nationally syndicated daily TV show, and the Martha Stewart Living Radio channel on

Sirius Satellite Radio

(SIRI) - Get Report

.

The company merchandising revenue climbed 28% for the quarter thanks to its relationship with

KB Home

(KBH) - Get Report

, which offset lower sales from its relationship with

Sears Holdings'

(SHLD)

Kmart stores.

Internet revenue increased 82% to $2.8 million.

For the fourth quarter, the company is now expecting revenue in a range from $91 million $95 million, which would bring its full-year results in line with the high end of its guidance of $270 million to $280 million.

Martha Stewart Living expects to report operating income for the fourth quarter of $10 million to $11 million and an operating loss for the year between $6.5 million and $7.5 million.

The company also said it expects the class action suit brought against Stewart and its two former directors to be settled for $30 million. That would bring an end to the domestic diva's legal troubles, which put the company in a tailspin starting four years ago.

In an interview Tuesday with

CNBC

, Lyne declined to comment on rumors that the company will be taken private. Analysts say its debt-free balance sheet, coupled with Stewart's newfound distaste for the glare of public scrutiny, make it a good buyout candidate.

"We are very focused on business." Lyne said.