[opendtv] News: WALL STREET BULLISH ON BROADCASTING
- From: Craig Birkmaier <craig@xxxxxxxxx>
- To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
- Date: Wed, 21 Feb 2007 08:53:12 -0500
http://www.tvnewsday.com/articles/2007/02/21/daily.2/
WALL STREET BULLISH ON BROADCASTING
TVNEWSDAY, Feb. 21, 6:36 AM ET
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.
By Price Colman
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 TVNewsday.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."
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