Will the Deen Debacle Devastate Your Stocks?

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Everyone's former favorite Meemaw, Paula Deen, is seeing her cooking empire crumble as six of the companies she either endorses or is involved with have dropped her: Wal-Mart, Smithfield Foods (NYSE: SFD)Caesars Entertainment (NASDAQ: CZR,)  Novo Nordisk, Home Depot, and Food Network, owned by Scripps Network Interactive (NYSE: SNI).  Her admission that she used  a racial epithet decades ago in a deposition has created another flashpoint in the country's racial debate.

Still deciding whether to keep her as an endorser are Target, Sears Holding, and QVC, a home shopping channel owned by Liberty Interactive Corporation (NASDAQ: LINTA), although by the time you read this, they will likely have dropped Deen as well.

Slogging through her deposition my takeaway was she was a loyal big sister to her brother who co-owns the Uncle Bubba's restaurant at which alleged sexual harassment and racial abuse took place and that she knew little or nothing of any problems there. Whether the deposing attorney's question, had she ever used a particular racial slur, was really germane to the case is just a lingering question.

Fallout from the furor

The damage is done and at Caesar's, the people who work at the four Paula Deen-themed restaurants that will be shuttered are unemployed, those who worked on her two Food Network shows are jobless, and a proposed buyout of Smithfield Foods by a Chinese buyer has yet more issues.

Paula Deen fans are all over the Food Network Facebook page protesting and her replacements are feeling some of their outrage. Deen fans have threatened a boycott of Smithfield Foods who carry Deen endorsed hams. This is coming at a time of delicate negotiations between Smithfield and a Chinese buyer already complicated by Congressional concern over Chinese restrictions on US meat imports.

So far, Wal-Mart, the world's largest retailer, has not seen any significant reaction. Target and Sears Holding probably won't see a hit either whether they keep her or not, but these smaller names, Caesar's with a market cap of $1.55 billion and Smithfield Foods, market cap $4.55 billion, have already been affected.

The fan reaction is not surprising as many admired the 66 year-old grandmother who overcame years of crippling agoraphobia and panic attacks. She started a small sandwich business to support herself, her two sons, and little brother Earl "Bubba" Hiers and grew it into an empire. Despite repeated tearful apologies most of Deen's endorsements are gone forever although Novo Nordisk has left a tiny window open if Deen can gain the trust of her audience back.

When Nike dropped Tiger Woods and Lance Armstrong neither celebrity showed much remorse, especially not Armstrong. In these cases the companies should have known better as rumors of problems had been lingering for years.

What's a company to do  when the celebrity was a beloved figure and helped the bottom line? In time the furor will die down and once one company dropped her the others had little choice but to bite the deep-fried bullet. Smithfield's stock had already had a huge runup after news of the Chinese buyout broke. Those who were still in the meat and pork producer name after that, hoping for something more, were just greedy hogs (pun intended).

Caesars, though, is a troubled company. It has negative EPS of $11.45 and the stock closed on June 26 at $12.79. Why a company that owns 52 casinos in 7 countries can't make money is a question shareholders might want answered. For the record, Paula Deen earned $17 million in 2012  and she didn't have the house advantage.

Unlike its competitors Las Vegas Sands, MGM, and Wynn it has no real Macau exposure except for a golf course. Both Wynn and Las Vegas Sands are much better buys for casino exposure.

What of the two competing media companies, Scripps and Liberty? Scripps Network Interactive trades at a 14.71 trailing P/E and has a yield of .90% and a PEG of 1.27. It owns both premium paid content like DIY Network  as well as its cable content of the aforementioned Food Network and other lifestyle channels like HGTV.

Of all these companies, Scripps Network Interactive's Food Network will have to do the most shuffling replacing Deen's popular shows. The next earnings release may even show a drop in viewership hitting the bottom line. The company had already seen declining ad revenue due to a drop in viewers before the Deen controversy.

QVC, a home shopping channel, may drop Deen in the next few days.  Liberty Interactive's stock is five per cent off its 52 week high of $24.31 and is trading at an 8.46 trailing P/E with a 1.07 PEG. QVC only trails e-tail giant Amazon in e-commerce sales and a new mobile app should nudge sales higher. QVC is moving into international markets, just recently inking a joint operating agreement with China National Radio.

The company operates in two divisions, Liberty Interactive, operating the video and websites and Liberty Ventures, which holds interests in Trip Advisor, Expedia, and Time Warner. Caveats are a high (not good) corporate governance risk rating of 10, mainly on shareholder rights and compensation.  It also has a complicated relationship with Liberty Media with which it shares headquarters and CEO Greg Maffei. One could characterize the two companies almost as media hedge funds.

QVC is not as reliant on Deen as Food Network so little impact there. QVC has 69% market share of the home shopping market, outpacing rival HSN which operates the Home Shopping Network.

A hit to the breadbasket

Paula Deen Enterprises has taken a major hit to the breadbasket. . At the very least, the embattled grandmother is probably wondering why she ever bothered to leave the house so many years ago.

Days and weeks from now this will all die down but Smithfield Foods is already in play and the easy money made. Caesars is a no-touch with better casino stocks to pick.

Of the two media companies, Liberty Interactive is making money hand over fist with QVC and has a lower PEG and P/E than Scripps and it's making strides internationally.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Scripps Networks Interactive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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