Wells Fargo Downgrades TV Stock Sector

Citing concern about the regulatory environment, securities analyst Marci Ryvicker and her Wells Fargo team today downgraded TV station stocks from overweight (buy) to market weight (hold). “Can’t fight city hall,” they say.

“Quite honestly, we are frustrated with the call given that we really like the underlying fundamentals of the business, as we see strong core and political advertising revenue trends, robust [free cash flow] generation, and a nice growth trajectory for net retrans,” they say.

“Unfortunately, we just see the regulatory environment worsening in the near term, which is likely to put pressure on trading multiples as well as lead to estimate reductions (especially for those with deals pending before the FCC).”

The downgrade comes as the FCC is preparing to tighten ownership rules to make it more difficult for station groups to operate two stations in small markets. The FCC and Congress have also taken steps that may make is more difficult for stations to negotiate for retransmission consent payments from cable and satellite TV operators.

“At this point, we feel that the stocks are likely range-bound at 6-7x blended free cash flow,” they say. “The good news is that our companies under coverage already appear to reflect this, even on our newly reduced estimates, which to us suggests limited downside risk (unless there is the need for further estimate cuts).  

“The bad news is we see limited upside potential – all due to the regulatory environment – hence, our sector downgrade to market weight.”