Investors Put Their Chips On Television

The bets have been placed on Wall Street, and a clear winner is the broadcast television industry. In particular, station operating groups have prospered in public trading over the past year.

Seven publicly traded groups have registered double-digit gains year to date, and on a year-over-year basis, three stock prices have gained more than 50% — those of Scripps, Gray and Nexstar.

Five have bettered 20% gains YTD — the aforementioned along with Sinclair and Tegna.

Only one stock price gained less than double digits YOY, and perhaps tellingly, it was Meredith, which does much of its business in the print universe.

Three of the big four networks also participated in the bounty. The exception was CBS, whose stock lost value YOY while gaining a modest 4.1% YTD.

The industry blew the doors off of two major indices, generally outperforming both the Dow and S&P by wide margins.

Advertising generated by the 2018 mid-term elections was a key factor fattening broadcast balance sheets, and the category only figures to heat up in the 2020 presidential year.

Stock Prices On The Up And Up

*Numbers for Fox are not applicable since the company’s sale of various assets to Walt Disney Co. closed on March 20.

A Q&A To Break It All Down

Kyle Evans

Station operators are cleaning up on Wall Street, outpacing both the networks and major stock indexes. Political spending is only part of the story — perhaps more important are television’s top-to-bottom solid business fundamentals. Stephens Inc. analyst Kyle Evans takes it apart in this Q&A with TVNewsCheck’s Dave Seyler.

An edited transcript:

What is the primary driver of the gains in stock price?

The broadcast TV names are up on accretive M&A, better-than-expected core ad trends, very strong political ad spending in the 2018 cycle with upbeat commentary about the 2020 cycle, and solid retransmission trends, where subscriber counts have held up well. Apollo’s $3 billion bid for Northwest Broadcasting and Cox Media Group has also brought renewed attention to the group.

Does political figure into this phenomenon?

Absolutely. TV lost its political mojo in 2016 and found it again in 2018. Station groups held back inventory in 2016 for campaigns and PACs, the anticipated demand didn’t materialize — mostly due to the presidential race, almost all the public TV names missed guidance and the group got punished by investors. Demand was much, much stronger in 2018 with several groups reporting 50%-plus cycle growth off 2014. This high-margin revenue helped delever the group, a clear positive for investors worried about high debt levels deep in a growth cycle, and we believe the lower leverage levels helped spur the recent round of consolidation.

Two companies’ gains are on the low side — Meredith and CBS? Why?

Meredith lagging the group makes some sense given that the recent run in its peers is tied to strong political ad spending and M&A. Meredith delivered very strong political ad spending growth last year — over 100% cycle growth — but its TV business is a smaller piece of overall revenue since the Time deal and political ad rev was less than 5% of total revenue in 2018 vs. almost 10% for peers. We also believe Meredith isn’t likely to be a meaningful participant in the current phase of TV station consolidation — either as a buyer or seller — as management is appropriately focused on integrating its recent acquisition of Time.

I suspect CBS has lagged the group due to ongoing rumors of a Viacom transaction. I have no way of knowing what the respective boards will do, but I do believe there is a meaningful subset of investors that appreciates CBS for its high-quality programming, its position of strength in the media ecosystem, and its solid results, which have been driven by positive unit volume and unit pricing trends.

In our view, bigger isn’t always better and a merger could make CBS a less attractive acquisition target just as Amazon, Apple, Google, etc. have clearly set their sights on the largest screen in the house.

How sustainable is this phenomenon?

I wouldn’t be surprised to see the group take a break and trade sideways given the recent run. Expectations are already fairly high for 2019 core ad revenue and the 2020 political cycle, and both seem to be somewhat reflected in the stocks already.

Regulatory relief from the FCC on the U.S. TV household cap would be a clear and significant positive for the group, and we believe it makes perfect sense in a world where competitors and counterparts to broadcast TV aren’t bound by the same rules, but it is also very hard to probability weight. I expect company-specific catalysts to be more important drivers of the stocks for the balance of the year.

Which companies are the best bets going forward and why?

I like Nexstar and Gray Television for their deal synergies, solid management, strong retrans rates and attractive valuations. We also like CBS. To us, it looks like rare, high ground in a rapidly consolidating and hypercompetitive industry. We expect solid results for the balance of the year, and view it as a potential acquisition target.

We think Sinclair could make an interesting play for the RSNs being divested by Disney, but we don’t have enough detail to model a transaction yet.