The Street seems to have shed its rose-colored glasses when it comes to Martha Stewart Living Omnimedia ( MSO). And despite some sharp-looking deals, the squinting could continue well into the near future.

Shares in the company have tumbled hard since the debut of The Apprentice: Martha Stewart, shedding some 35% of their value. Analysts expect MSO to lose 30 cents per share on $40.7 million in revenue when the company reports third-quarter earnings Thursday. Given that the stock remains pricey by a number of measures even after its recent slide, some observers remain dubious about Martha Stewart Living's prospects in coming months.

"At its current price, the stock still appears overvalued," says Bear Stearns research analyst Michael Meltz in a recent research note. He still believes the stock has downside, given expected operating losses and a lack of major positive catalysts.

"On our 2006 estimates, MSO is trading at nearly 110 times EPS (before options costs), 48 times EBITDA, and 45 times free cash flow. The stock is trading at roughly 30 times peak EPS. While the EBITDA multiple is more palatable when looking at 2007 estimates, valuation is still lofty (22 times) and is accompanied by below-average visibility," Meltz wrote. Bear Stearns seeks to do business with MSO.

The Apprentice show, a promotional vehicle for its re-emergent lifestyle czarina, has yielded only middling ratings for GE's ( GE) NBC. Meltz says that "the ratings reality for new TV initiatives has been somewhat of a buzz-kill." The Apprentice is hitting close to 7 million viewers now, while Martha, the company's syndicated daytime show, is doing reasonably well. Meltz does note, however, that "while the ratings performance for The Apprentice has been disappointing, we do think it has been a success in terms of introducing the Martha Stewart brand and MSO products to a wider audience -- as 6-7 million viewers is more than three times the subscriber base of Martha Stewart Living," the company's flagship magazine.

Make no mistake, the company has been busy on the branding front. It has Christmas CDs packaged with Martha recipes coming soon, along with the launch of her Sirius ( SIRI) channel this fall, a homebuilding pact with KB Home ( KBH), a home video deal with Warner Home Video and other developments in the magazine division. Meltz points out in his note that "MSO has done a good job developing new revenue opportunities in 2005" and sees additional merchandising partnerships on the horizon. Even so, there seems little near-term reason to buy the stock.

Two major catalysts for this company may present themselves in the next phase of chief executive Susan Lyne's plans. Lyne has said recently that the most crucial priority for the company next year will be to launch a major Web presence. Stewart and Lyne need to figure out how to best capitalize off online advertising and merchandising sales through the Web. Expect Lyne to be deliberate and execute properly on launching a major new online initiative. When they do, the revenue picture is going to improve.

As Meltz puts it, "We believe the longer-term prospects look good for Martha Stewart Living Omnimedia. Since Susan Lyne became CEO back in November 2004, she has breathed new life into the company via a strengthening of the management team, launch of new products and partnerships, and successful efforts to get advertisiers back to Martha Stewart Living." He says the company "has always been unique in its ability to effectively leverage content across its various assets. While the television initiatives may be disappointing from a ratings perspective, they have definitely highlighted the immense power of the 'Omnimedia' model."

A strong Internet play, along with the potential for a re-engineered deal at the retail level with the Kmart unit of Sears ( SHLD), could be two positives that should propel this company looking forward.

Investors might get some dribs and drabs of good news as the well-baked emotion surrounding Martha and her stocks cools off. Meanwhile, despite the fact that Lyne has poured a strong foundation for MSO's future, investors continue to bring the stock back to earth.

On Wednesday, shares of Martha Stewart Living Omnimedia were trading down 28 cents to $20.37.

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