Station Group Stocks Back From The Dead

Call ’em the comeback kids.

Station group stocks, particularly pure plays, have rebounded robustly from the pit they fell into during the Great Recession. On average, the prices are up more than 19 times from the bottom of 2008-09.

While the rebound has been impressive for all, two stocks stand above the rest: Nexstar and Sinclair.

Nexstar leads the rebounders by a good margin, up nearly 39 times from the 53 cents it sunk to in early March of 2009. Sinclair is in second place, up nearly 37 times since hitting a low of 70 cents that same month.

Gray is next, up nearly 28 times from the low of 18 cents it hit in November 2008. Others participating in the share price recovery include Belo, up 24 times, and LIN, up just under 20 times.

Companies with a mix of stations and print, particularly newspapers, have enjoyed the rising tide, though less robustly, as the drag from the print side remains a limiting factor.

Here are the broadcast stocks with their recession lows, yesterday close and percentage change between them. The recession lows occurred in either February or March 2009 with the exception of Gray, which reached its nadir in November 2008.

• Belo (BLC), $0.42, $10.58, 2,419%
• Fisher (FSCI), $5.39, $41.30, 666%
• Gannett (GCI), $2.20, $21.28, 867%
• Gray (GTN), $0.18, $5.15, 2,758%
• Journal (JRN), $0.39, $6.56, 1,581%
• LIN Media (TVL), $0.57, $11.96, 1,998%
• Media General (MEG), $1.35, $8.27, 513%
• Meredith (MDP), $9.44, $37.95, 302%
• Nexstar (NXST), $0.53, $20.96, 3,855%
• Sinclair (SBGI), $0.70, $26.39, 3,670%
• Scripps (SSP), $0.72, $13.49, 1,774%
• Washington Post (WPO), $274.77, $445.49, 62%

While the overall economic rebound plays a crucial role in driving up prices, the broadcast sector itself gets some bootstrap credit for restoring its fortunes. Station groups have been disciplined in reducing debt, managing expenses and enhancing revenue and cash flow.

“The industry is developing a very good reputation for being a strong generator of cash, in odd years as well as in even years,” explains Michael Alcamo of M.C. Alcamo & Co., an investment banking firm. “Clearly, broadcast stocks have outpaced the broad market through the recovery.”

Sinclair CEO David Smith says the rising prices signals renewed faith in television. “AT&T recently announced that it is moving forward with new TV platform,” he says. “What that means is that in the future broadcasters are going to be incredibly good for businesses. We’re the most efficient way to get mass information to the marketplace.”

For the pure plays in particular, the resurgent station trading market has been an important driver. Typically, shares of acquiring companies retreat on news of a deal.  But the recent acquisitions by Sinclair and Nexstar are driving investors to, not away from, those stocks.

“One factor is the combination of cheap financing and available M&A at attractive valuations,” says Barry Lucas, senior vice president at Gabelli & Co. “Sinclair can buy properties at 5-6 times cash flow and finance at roughly 6%. You can make a pretty good living off that.

“Another part on the operating side is recovery in the auto industry,” he adds. “That’s what crippled the companies going into the recession.”

Auto advertising is the single biggest source of station revenue, typically accounting for around 25% of the total. But real estate and banks, both hard hit during the recession, are coming back solidly as well.

The big percentage gains that the broadcast stocks have posted over the past four years are a function of the extraordinary depths to which they had fallen. All had to claw their way out of penny-stock purgatory to get to where they are now. Although Gray was the lowest of the low, Belo, Nexstar, Sinclair and LIN all traded below $1 in the depths of the recession.

When Gray was trading at around 18 cents in November of 2008, Robert Prather, Gray president and COO, focused on improving company fundamentals, not driving share prices up.

“I felt like the company had strong enough cash flow, a strong enough presence in the financial world that banks would stand by us,” Prather recalls. “I didn’t worry much about the stock price. Get your financial house in order and the stock price will take care of itself.”

Gray’s rising share prices appear to validate that approach.

Station group stocks’ big comeback is a testimony to the fundamental strength of the companies and the sector. Once a stock falls into pink sheet territory, it must dig deep to get back into the land of the living. These station groups have been disciplined at repairing what were in some cases fragile balance sheets.

That’s only part of the story, of course. Impressive as the post-recession rebound has been, nearly all these stocks — particularly those combining newspapers and station groups — still have a hill to climb.

In the heady pre-recession, station groups were fetching as much as 15 times cash flow and many of the stocks were at or near all-time highs.

As that bubble was about to burst, says Lucas, “You had relatively inexpensive financing and an influx of private equity buyers with what was thought to be cheap money at the time driving purchase multiples above what strategic buyers were willing to pay.”

A key difference is now, he says, “you have strategic buyers with pretty good insight on how things work looking to maximize free cash flow.”

Smith and Sinclair deserve a big chunk of the credit for leading the consolidation surge. In February of 2011, Sinclair had roughly 55 stations in its stable. Now, after spending nearly $2 billion, Sinclair has pumped up its portfolio to 134 stations. To manage those assets more efficiently, Sinclair recently named Steve Pruett, former Communications Corp. of America top boss, to head a small-station division.

The consolidation that has investors betting on station groups will only accelerate, Smith contends.

“Five years ago if you wanted to try to assemble something to accomplish a broader platform, you needed 20 people at a table,” Smith says. “It’s hard to get a lot of people to agree on anything. But if you think about it, in two years you may need only five people at the table to cover 180 cities. I think it will be easier to make decisions if we have an alignment of interests in terms of how we put spectrum space together.”

Sinclair’s recent announcement that it was buying Fisher Communications for $373.3 million has provided much of the momentum for the stock’s recent rise. It also prompted Wells Fargo analyst Marci Ryvicker to put an outperform rating on the stock and raise high-end price estimates to $32-$34 from the previous $24-$26.

“Perhaps the biggest positive takeaway outside of the [Fisher deal] numbers is that there is still plenty more SBGI could do,” Ryvicker wrote in her note boosting earning estimates and the stock valuation. “According to FCC rules, SBGI covers only 18% of U.S. television households post this deal — a far cry from the 39% cap.”

And just as the consolidation still has legs, the run-up in stock prices appears to have upside left.

Sinclair is hardly the only group buying. It outbid LIN Media for Fisher and Nexstar for Barrington. But along with Nexstar and LIN, other groups — Belo, Hearst and Scripps, for instance — are likely buyers.

The next advances, assuming they occur, may be more challenging.

While it would be foolish to dismiss another potential bubble for station group stocks, it appears unlikely in the near term.

“Nexstar is trading at only 7.6 times forward 12-month earnings,” notes Alcamo. “At that level, with its excellent cash flow characteristics, it remains a very affordable and appealing stock.

“All the leading broadcast stocks still trade at forward PE multiples significantly below that of the S&P 500. Bear in mind that the S&P includes many stocks with rapidly growing earnings.”