Why Television Station Owners Have Positive Momentum
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In my eyes, one of the most surprising stock surges of 2013 has been that of Sinclair Broadcast Group (NASDAQ: SBGI). I had recommended this company for its substantial dividend yield in earlier blogs such as this one. But, the company launched a growth and expansion strategy that has incited Wall Street to bid up its shares.
Apparently Gannett, the newspaper behemoth, witnessed the value of broadcast TV station ownership and made a move to substantially raise its stake in that sector with an agreement to acquire Belo Corp. (NYSE: BLC). The takeout price was pegged at $13.75 a share, well above the pre-announcement value of Belo's shares.
The immediate advantage to owning TV stations is a steady stream of healthy cash flows that may be reinvested in the business or doled out to shareholders. Viewership ratings, however, can help or hurt a specific company's performance, and can be a key positive factor, such as with CBS Corp. (NYSE: CBS), owner of many CBS stations.
How Sinclair has Expanded
In 2012, Sinclair increased its station count to 86 from 73 without issuing additional long-term debt. So far this year, it has inked deals to purchase seven more stations, continuing to boost the number of FOX affiliates it owns. Indeed, FOX is its largest station group, followed by MyNetwork TV, the CW, CBS and ABC as of March 31st.
Revenues are reflecting the new assets. However, due to it being a cyclically slow (non-election or Olympics) advertising year, and possibly because of lower margins on new stations, earnings have trended lower in 2013. Illustrating how stronger ratings can assist results, CBS is contributing 23% of ad time sales, though it comprises only 13% of the station count.
It is likely that management will continue to seek out buyout opportunities, while continuing to pay a dividend (yield currently 2.1%). Purchase the shares in anticipation of a much-improved bottom-line showing and for income.
The broadcast advertising market's segmentation
Being that Sinclair's stations are predominantly in small- and mid-sized U.S. cities, its revenues are derived mostly from locally-based advertisers in each market. It also receives a portion of revenues from the national ad market. The automotive industry, including automakers and dealerships, comprises the largest advertising group. Spending has climbed this year, likely in tandem with rising domestic automaker profits.
With the acquisition of Belo, Gannett would be gaining 20 stations, including NBC, ABC, and CBS affiliates in roughly equal numbers. Belo brings with it wide operating margins, and solid cash flows. Gannett would henceforth own 43 broadcast TV stations. Belo's existing stations consist of several in larger markets, such as Dallas, Houston, and Phoenix, but it, too, is significantly reliant on local ad demand. In the March quarter, its earnings per share increased to $0.16, up from $0.14 in the prior year, on slightly higher overall revenues. Belo shares are trading on the pending deal to be bought out and without such an agreement would be primarily an income investment (see my earlier blog on the Gannett / Belo deal).
How CBS is Winning
CBS, as one of the few companies with a primary focus on creating new programming for traditional broadcast TV, is a consistent leader on the ratings charts, thanks to shows such as NCIS and CSI. Its was recently reported that CBS' upfront ad sales rose more than 8% year over year, a sign of stable spending trends (see my prior blog on this subject).
The company additionally broadcasts premium cable networks, Showtime and the CBS Sports Network, properties that are supporting profit advances. Plus, it is building its foothold in the digital / online broadcasting market through deals with the likes of Amazon and Netflix, helping to maintain its visibility and audience share.
On that note, CBS will face even greater competition from cable and online media sources. Still, it, for one, ought to invest in growth operations, and thus prolong its profit growth trend as long as conditions are conducive. Given healthy ad spending, CBS shares are a good way to gain exposure to the broadcast television market, while also benefiting from the ownership of a major entertainment conglomerate. The stock is trading at a P/E of 14.6x forward earnings. The company may well earn about $3.04 a share in 2013.
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