News at 11: Television Networks Are Still Breathing

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Owners of local television stations have been left for dead, as cable, satellite, and online outlets have eliminated the major networks’ former stranglehold on viewers and advertising revenues.  While overall viewership has declined over the years, the major networks’ programming remains a popular choice for a large segment of the population.  According to data provider Nielson, the top 20 shows each garnered more than 8 million viewers in the latest weekly rankings.  The resulting situation has crimped profits of the local station owners, as they have had to pay rising costs for content while dealing with the defection of portions of their advertising customer base to alternative platforms.

Time to Think Differently

The local network affiliates have historically been very valuable, stable businesses, due to a limited number of broadcast licenses and a large stable of loyal viewers.  These factors allowed them to utilize significant amounts of debt in their businesses and pay high salaries to their personnel.  However, the days of relying on network programming to bring the advertising community to their doorstep are over.  The plethora of media outlets currently available to local companies has permanently changed the balance of power.  In response, smart companies in the industry have lowered their debt levels and have engaged in restructuring activities to capitalize on their strengths in local programming.

What's the Value?

Community news organizations have valuable assets through their expertise at developing interesting, local content and their ability to create long-term relationships with the viewer community.  Recognition of the potential profits from these assets has led some smart investors to target the sector.  Berkshire Hathaway (NYSE: BRK-B) has been a long-term investor in media companies through its ownership of the Washington Post and the Buffalo Evening News.  While the media business generates a small portion of the company’s $136 billion in annual revenues, Berkshire has been an active investor lately in both public and private markets.  Similarly, News Corp (NASDAQ: NWS) has been an active purchaser of local media companies, especially in the sports entertainment niche.  In the past year, the company has acquired stakes in the YES Network and SportsTime Ohio, adding the two companies to its vast network of regional sports properties.

The Newest Reporter:  You

While investors could purchase either of these titans and probably do well, local media revenues account for only a small portion of their overall businesses.  A better, though perhaps riskier, approach would be to target the owner of local affiliates that have considerable geographic diversity.  One of the best positioned companies in the current environment is Lin TV (NYSE: LIN).

Founded in 1966, the company owns 43 stations that are affiliated with one of the four major television networks.  It has targeted its portfolio of properties around smaller population markets where it can build a leading position, with 83% of its stations ranked #1 or #2 in viewership.  Lin has also successfully transitioned its viewer base to the web, with television websites in 15 of its markets that generated over 9 million unique visitors in 2011. 

In its latest fiscal year, Lin reported revenues and operating income of $400.0 million and $89.1 million, decreases of 2.0% and 20.3%, respectively, versus the prior year.  While the company generated increases in local and interactive advertising revenues, the lack of a national election led to a significant decline in political advertising revenues.  Lin’s operating margins were also hurt by rising programming content costs as part of new agreements with the major networks.

However, Lin’s results have rebounded sharply in FY2012, with increases in revenues and operating income of 23.9% and 68.3%, respectively, compared to the prior year period.  While the U.S. elections earned significant revenues for the company, its interactive segment generated the largest sales increase, due to both organic growth and strategic acquisitions.  Lin’s local advertising revenues also benefited from strength in the auto sector, as national auto sales are expected to exceed 14 million vehicles in 2012.  With political ad spending guaranteed to decline in FY2013, Lin has proactively used its operating cash flows to improve its financial position and invest in additional local programming. 

The Bottom Line

The company’s stock price has had a strong run, up 114% over the past year, but Lin is valued at an 8 P/E multiple and is a cheap way to invest in the continued growth of small business.  Investors should put this broadcaster on their watchlist.

rghanley owns shares of Berkshire Hathaway and Lin TV. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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