"[We] do think there is more upside potential to the stocks and multiples; we do think there are more positive than negative revisions to core ad estimates (although we caveat it is still very early); we do expect a change to the 39% cap (and other ownership rules); and we do anticipate the station groups to be included in the streaming packages … eventually," Marci Ryvicker's team at Wells Fargo says in a note to investors today.
Ryvicker: Trump Bodes Well For TV Groups
Publicly traded TV station group stocks, up 18.5% since Donald Trump’s Nov. 8 upset, should rise even more during the Trump years, and not just because of prospects of deregulation at the FCC, according to a note to investors from Marci Ryvicker’s team of analysts at Wells Fargo Securities.
“In a nutshell, we do think there is more upside potential to the stocks and multiples; we do think there are more positive than negative revisions to core ad estimates (although we caveat it is still very early); we do expect a change to the 39% cap (and other ownership rules); and we do anticipate the station groups to be included in the streaming packages … eventually,” the note says.
“Bottom line: We continue to like this sector and these stocks and specifically highlight [Sinclair] and [Nexstar] as having the greatest potential upside from here.”
Wells Fargo doesn’t see much downside for local broadcasting in the Trump victory. “Look, Trump has made his distaste for the media very well-known both during and after the election. But, he has also stepped back from a lot of recent threats/ promises. So the real answer is we don’t know. While our gut tells us Trump shouldn’t be an issue for the station groups.”
Based on conversations with the companies, Wells Fargo expects most of the groups it tracks to post small gains in core advertising next year, led by Sinclair (+3.4%), Tribune (+2.6%) and Nexstar (+2.2%).
Tegna, it says, will be down 1.7% in core, but excuses the group because of tough comps due to its strong performance this year in selling around the Olympics.
Another factor in the run-up of the stock is the anticipation that the new FCC will raise the 39% cap on national station ownership, unleashing another wave of consolidation.
“Yes — we absolutely think that this 39% cap gets changed. It is a high priority for the broadcasters. And from our D.C. conversations, a seed has clearly been planted with both the FCC and with Congress.”
The cap will probably not be eliminated, it says. “Maybe it’s 45% since [Tribune] is at 44%? Or maybe it’s 50% because that’s a nice round number that sounds good and is also easy to remember? At the end of the day, we aren’t all that concerned about what the new cap ultimately is — we just care that it is likely to be lifted.”
For various reasons, it says, the networks are not to be feared. They will not take advantage of the raised cap to buy up its affiliates and turn them into O&Os, except in rare cases. That will leave the field open to consolidators like Sinclair and Nexstar.
Broadcasters are also looking to relax the local ownership restrictions, it says. “A direct result of this change would be even more M&A activity across the entire sector.
“In our view, the biggest potential beneficiaries of elimination of the duopoly rule seem to be [Meredith] and [Scripps]; while the biggest potential beneficiaries of elimination of the eight-voices test being eliminated include [Gray] and [Nexstar].”
Wells Fargo is also bullish on broadcasting because it’s confident that their stations will eventually be included in all the major streaming services like Sony PlayStation Vue and DirecTV Now.
“This is so intensely complicated, which is why it’s taking so long. But, conversations are taking place and this seems to be a priority. Interestingly, DirecTV Now is negotiating with the affiliates directly. From our conversations, we expect resolution in ’17.”