You could have doubled your money over the past several months on companies like Sinclair, LIN and Nexstar as investors look past sagging spot sales to explosive growth in political advertising, new revenue from retrans and the Web and solid station sale prices.
If you’d been contrarian enough a year ago to dump your IRA into a few broadcast stocks, you could retire now. Shares of LIN TV, Sinclair Broadcast Group, Gray Television and Nexstar Broadcasting have doubled or better.
Sure, it was a good year for Wall Street with the Dow and Nasdaq up double digits—the best performance equity markets have seen since the Internet bubble. And sure, you can argue that a rising tide lifts all ships. So what’s so special about the broadcasters versus the rest of the market?
For the chosen few, more or less pure-play broadcasters, a perfect storm of retransmission fees, political spending and increasing Web revenues provided an updraft the stocks haven’t seen in years, maybe ever.
“The market loves the new hot growth thing and retrans fees have been incremental for TV,” says Bishop Cheen, a fixed-income analyst at Wachovia Securities. “The market believes it’s going to grow like Topsy.”
It’s not just new revenues, either. Broadcasters have been working hard to cut costs, trim debt and increase efficiencies. It’s a rare broadcasters who won’t jump a chance to own or operate a second channel in a market.
For the record, Sinclair has doubled to $15-plus after hitting its 52-week low of $7.18 on Feb. 28, 2006. LIN has done even better, rising 136% to $14.44 since hitting a 52-week low of $6.12 on July 21, 2006.
Not to be outdone, Nexstar shares are up 120% to $7.73 since October and Gray Television shares are up nearly 80% to $9.23 since mid-summer.
The laggards in the group are Hearst-Argyle Television, up 32% to $26.45 since August, and Fisher Communications, up nearly 18%to $45.73 since August. (All figures as of Tuesday’s close.)
Most of these stocks, listed in the TVNewsCheck.com index, had been out of favor on Wall Street for some time, victims of single-digit revenue growth that, with inflation, translates into no growth.
“There was a lot of talk several years ago that these businesses were dead,” says station broker Larry Patrick of Patrick Communications. “People saw TV as a one-legged stool and that leg was national advertising.”
But while Wall Street was looking elsewhere, TV was building a new stool and a few savvy investors noticed certain broadcast stocks were good investments.
“It’s pretty normal for washed out sectors that analysts often get stocks wrong,” says Kit Spring of St. Louis-based Stifel Nicolaus & Co’s Denver office. “Street recommendations often are a contrarian indicator. Why some peers may have missed it, they may not have been paying close attention.”
A major factor in the turnaround has been retransmission consent revenue or at least the prospect of it. For the first time, investors believe that broadcasters will finally be able to wrest substantial cash payments from cable operators that carry their signals.
That cable cash would come on top of the retrans fees that broadcasters have been getting from satellite operators and telephone companies as they begin to compete with cable.
By squeezing hard in retrans negotiations with cable operators over the past two years, companies like Nexstar and Sinclair have shown the potential. During its fourth-quarter earnings conference call, Sinclair said it expects its retrans revenue to increase nearly 90% this year to $48 million.
“What’s so exciting about retrans, it’s a 100% margin revenue stream,” says Spring. “It all falls to the bottom line.”
Retrans may be a big driver, as Cheen and others note, but political ad dollars are certainly helping, too. Candidates poured more than $2 billion into the coffers of TV stations last year, boosting national TV spot year-over-year growth into the double digits.
Better yet for broadcasters, industry experts expect 2007 to generate as much as $750 million in political spending as a big field of presidential candidates vie for their party’s nomination.
“Political is hot and it’s juicy,” says Cheen. “You can’t turn on the TV without hearing a story that impacts the 2008 race. For an off year, political spending is probably going to set record. It could come close to 1996 or 2000.”
It also helps stock prices and private-market values that broadcasting is suddenly being seen as a digital player—that is, a medium with a real future.
Broadcasting’s Web revenue is growing rapidly. What’s more, there is a growing perception that broadcasters will be able to monetize their over-the-air digital signals through HDTV, multicasting, datacasting, mobile broadcasting—something.
By law, every TV station will have to make the leap to digital broadcasting by Feb. 18, 2009—less than two years from today.
So far, TV stations’ Web sites have had modest impact on top and bottom lines. But the impact is growing. Borrell Associates, a media research and consulting firm, reported last year that local Internet advertising revenues for TV stations increased 277% from 2004 to 2006 and that was still well under 4% of gross ad revenues.
“TV stations are under some revenue pressure,” says Colby Atwood, president of Borrell. “They’re seeing a lot of national revenue go down and they’re looking at ways to increase revenues. Suddenly, the Internet is a big opportunity.”
Also encouraging the stock players are the prices that private equity firms have been willing to pay for TV stations over the past year.
Just last month, Cerebrus Capital Management paid 15 times broadcast cash flow for CBS stations in four markets, according to a report by Bear Stearns analyst Victor Miller. Although that’s the high end, it’s well above the 11-12 times multiple public markets value stations.
These guys have absolutely mountains of money,” says Patrick. “They don’t want to throw it away on stupid things.”
Look for more deals and more evidence of the value of TV. Clear Channel Communications TV stations are on the block, and Miller believes that LIN’s principal shareholder, Hicks Muse Tate Furst, is ready to sell.
Patrick isn’t so sure. “If someone made a big enough offer, I think they’d go,” he acknowledges. “But we’re talking about a very smart seller here. LIN could get 13 to 14 times cash flow, but the question is, after taxes where do we put the money.”
The economy and interest rates remain question marks. Private equity investors like TV stocks because they can borrow seven to eight times trailing cash flow. So as long as they can maintain strong operating margins and improve cash flow, broadcasters may be belles of the ball a bit longer.
“I have some clients begging me to invest in TV, which to be honest I would have never thought about doing,” says Patrick. “I’m now thinking about doing that.”