Stephan Savoia  /  AP
After being released from prison March 4, Martha Stewart waves as she boards her jet at Greenbrier Valley Airport in Lewisburg, W. Va.
By John W. Schoen ANALYSIS
msnbc.com

The main house and snow-covered grounds of her 153-acre estate in Bedford, N.Y., have been carefully groomed for her homecoming. The news media are poised for the fox hunt to capture pictures of her first hours of freedom. And after five months in a federal prison in West Virginia, Martha Stewart is ready to get back to work in her Manhattan office, where her employees are eagerly awaiting her return. 

As could be expected, much of Martha’s time in prison apparently was spent playing Scrabble, teaching yoga and making things in pottery class. But she hasn’t exactly ignored her business. In November, she hired Susan Lyne , former head of ABC Entertainment, as CEO, a position Stewart is currently barred from returning to. But Stewart's lawyers are reportedly trying to work out a settlement with the SEC in a pending civil action that would allow her to regain the CEO title.

Over the past few weeks, Lyne and company executives have been busy doing interviews — on television, radio and in print — announcing the “rebirth” of Martha Stewart’s various business enterprises. Shares of Martha Stewart Omnimedia have tripled since July.

But amid all of this enthusiasm Wall Street analysts, who are paid to take a more independent view of the company’s prospects, have been collectively scratching their heads.

Many have been advising their clients that the company’s stock — which accounts for the bulk of Ms. Stewart’s estimated $1 billion net worth — is headed for a fall.  Though her fans may be greeting her triumphant return with yellow ribbons, those ribbons may look to some investors more like the kind used to mark the boundary of a large, dangerous hole in the ground.

The latest window on the financial health of Stewart’s media empire came last week, when the company announced a $59.4 million loss for last year on revenues of $187.4 million. Those revenues were down 24 percent from $245.8 million a year ago, when the company lost $1.9 million. Company executives warned in a conference call that they expect to post another first-quarter loss of 35 cents a share —even worse than analysts have been expecting.

Revenues fell across all business lines except merchandising, which was essentially flat because of minimum royalties guaranteed in its contract with Kmart. Actual sales of Martha Stewart’s Kmart merchandise fell nearly 6 percent for the year. (In a quarterly financial statement last fall, the company said it does not expect actual sales of Martha Stewart goods on Kmart shelves to exceed the minimum guaranteed royalties until at least 2008.)

At the company's flagship magazine, Martha Stewart Living, which makes up about a third of the company’s revenues, ad pages were down 47 percent last year, according to the Publishers Information Bureau. The magazine's publisher abruptly resigned this week .

That kind of news from a company is generally not a good thing for shareholders. But the reports have had relatively little impact on Martha Stewart Omnimedia stock — which has tripled since Stewart began serving her prison term for conspiracy and obstruction of justice in October. The stock’s surge has buoyed the spirits of millions of Martha loyalists, who are eagerly awaiting her starring role in a spin-off of reality TV show “The Apprentice.” But the hype has left Wall Street wondering loudly just how long it will take for the reality of Stewart’s business problems to set in with shareholders.

Video: Too much of a good thing? “In our opinion, (Martha Stewart Omnimedia’s) stock performance remains disengaged from the company’s fundamentals,” wrote Credit Suisse First Boston analyst William Drewry in a Feb. 23 report titled “This Stock Price Still in la la Land.”

That opinion is widely shared by Drewry’s peers. With Martha Stewart Omnimedia’s stock trading this week in the low $30s, the median target price among analysts who follow the company is just $7, according to those surveyed by Thomson First Call.

There is no doubt the frenzy of publicity surrounding Stewart’s release has been overwhelmingly supportive of the iconic promoter of the domestic arts. Much of the press coverage has centered on her indomitable spirit and the grace and dignity she has exhibited since her widely publicized felony conviction. By agreeing to serve her term before exhausting all legal appeals, Stewart hoped to put her three-year legal problems behind her and allow her to return more quickly to the task of rebuilding her company.

So far, the plan seems to be working. From the day of Stewart's conviction, public sentiment has apparently been strongly behind her. Demand for the latest news of her release is  insatiable. In the eyes of the law, and her fans, Martha’s rehabilitation is nearly complete —pending a five-month house arrest that allows her ample latitude (48 hours a week) to get back to her office, kitchen and greenhouse and continue where she left off.

That kind of public support and publicity would be invaluable if Stewart were running for Congress (assuming she can reverse her felony conviction) or promoting a book about her prison experiences. But there is no evidence of any of the hype surrounding her impending release increased public desire to whip up a batch of petit-fours or brush up on the proper way to prune privet.

The company says it expects to see advertisers return to the company’s magazines now that Martha the citizen and Martha the brand are well on their way to full rehabilitation.

Much of the optimism surrounding the rebirth of her company centers on Stewart’s return to television — most visibly as the star of her own version of “The Apprentice,” which is set to air on NBC. (MSNBC is a Microsoft-NBC joint venture.)

“I don't know how you put a price on the ability to reach 15 to 16 million people a week with a show about your company,” Lyne, the CEO, told CNBC last week.

While the publicity may be priceless, it remains to be seen how much of the profits from that show, if it succeeds, will flow to Martha Stewart Omnimedia. Television has never been a big revenue generator for the company: Even in its best year, television revenues of $32 million only made up roughly 10 percent of the company’s business. (TV revenues fell to $1 million last year.) Even if the prime time show is a hit, it won’t bring in enough to justify the current optimism, according to analysts.

“I think the TV show has a great potential to turn around her image, and advertisers will come back to the magazine once her image has been rehabilitated,” said Gary McDaniel, a media industry analyst at Standard & Poor's. “But I don't think that they can generate enough ad sales to support the stock price.”

For the time being, in fact, cash has been flowing out of the company in preparation for Stewart’s television revival. Last September, the company signed a deal with reality TV guru Mark Burnett that included a consulting fee, payable as a warrant to buy up to 2.5 million shares of company stock at an exercise price of $12.59 per share. (Though Burnett can’t exercise the warrant until various “milestones”  related to the new program are met, at the current stock price the warrant is worth about $50 million.) Burnett reportedly will own the rights to the prime-time show, with the company owning the syndicated daytime show.

Regardless of the outlook for the company’s stock, Stewart won’t have to worry about her personal fortunes, thanks to the new employment contract she negotiated before checking in to prison last fall. 

On top of her widely reported $900,000 a year salary, Stewart will get a bonus of at least $450,000 and as much as $1.35 million is all goes well.

Then she gets a $200,000 “talent fee” for appearing on her shows. She’s also entitled to at least $500,000 for her appearances on each season of the new prime-time show plus 10 percent of any rerun revenues. She’s also guaranteed a “location rental” fee of between $500,000 and $750,000 for the use of her homes during the filming of her TV shows.

And in case she gets low on pocket money, Stewart will be paid a $100,000 “non-accountable” expense account along with free car and driver seven days a week.

Separately, Stewart has asked her company to reimburse her for $3.7 million in legal fees. (The company has said an outside expert is reviewing the claim.)

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