Networks Tap Political Wellspring

Obama! McCain! Biden! Palin!

Just 24 hours left. The election has generated unprecedented interest. Web sites focused on politics and news have enjoyed soaring page views. Cable news networks have doubled their viewers from a year ago. The debates had more people watching than in any recent election. Ratings for Saturday Night Live are the highest in years.

Despite the excitement, we will all probably enjoy the respite as the news flow winds down this week. But one group of companies probably wishes we were more like Ukraine and had an election every year -- TV stations. In 2008, projections are for $3 billion in political ad spending. SNL Kagan forecasts total TV ad spending to reach $44 billion in 2008.

With ongoing secular declines in auto advertising now accompanied by cyclical pressures in major categories like retail and finance, political has emerged as the only growth sector for local TV stations.

The following chart shows the history of political ad spending. SNL Kagan made some assumptions about the end of the election cycle to estimate 2008.

TV Station Pure Plays' Average Political Ad Revenues 1994-2006, 2008 (estimated)

Click here for larger image.

Source: SNL Kagan Media Money, Oct. 22, 2008, Authored by Justin Nielson

The data in the chart cover just the publicly traded pure-play TV station owners including Gray (GTN - commentary - Cramer's Take), Hearst Argyle (HTV - commentary - Cramer's Take), LIN TV Corp. (TVL - commentary - Cramer's Take), Nexstar (NXST - commentary - Cramer's Take), Sinclair (SBGI - commentary - Cramer's Take) and Young (YBTVA - commentary - Cramer's Take). This is not a group of stocks I have much interest in given the secular challenges they face and their generally debt-heavy balance sheets.

However, the biggest station owners are Disney/ABC (DIS - commentary - Cramer's Take), News Corp./FOX (NWS.A - commentary - Cramer's Take), CBS (CBS - commentary - Cramer's Take) and General Electric/NBC (GE - commentary - Cramer's Take). Those are stocks I care about, and while TV stations are not their primary business, they are material revenue drivers except for GE, where no single business besides finance is dominant.

One major theme in advertising over the past two years has been material weakness in local advertising relative to national advertising. Newspapers and radio have borne the brunt of this trend, but TV stations are not far behind. News Corp. in particular has suffered due to weakness at its local TV stations. CBS has outsized exposure, as it is much less diversified. Disney has the least exposure, but its stations might get a double dose of bad news if very poor ratings for ABC's prime-time schedule so far this TV season continue. Poor prime-time ratings hurt viewers for local news, which is where TV stations make their money.

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At time of publication, Birenberg was long GE in a few client accounts, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.