After Broadcasting Problems With Cash Flow, Sinclair Faces Investor Static

In a sign that local television station owners are still under pressure,

Sinclair Broadcast Group's

(SBGI) - Get Report

stock dropped sharply Wednesday after the company said late Tuesday that its revenue and cash flow would fall short of expectations in both 1999 and 2000.

In early afternoon trading Wednesday, Sinclair fell 4 1/4, or 29%, to 10 7/16 on extremely heavy volume of more than 8 million shares. For the year, Sinclair, which was discussed Wednesday in a

TSC

story as an out-of-favor company that could potentially benefit from changes in

Federal Communications Commission

rules, is down close to 50%.

The selloff came after Sinclair announced that its revenues would be roughly flat in both the third and fourth quarters of 1999 compared to 1998, while its "broadcast cash flow," a measure of profitability, would be down 1% in the third quarter and 9% in the fourth quarter compared to 1998. The company blamed the drop in its cash flow and operating margins on the need to spend more money on programming and advertising salespeople.

"In order to position our station group for 2000 and beyond, we are making an investment in sales, programming and promotion that will cause slight broadcast cash-flow margin compression," Patrick Talamantes, Sinclair's chief financial officer, said in a statement. The company plans to hire several new salespeople for each of its stations, as well as add eight new local newscasts and increase promotional spending for its programs, according to analysts.

Analysts, who had expected broadcast cash-flow growth of as much as 11% in the third and fourth quarters, were quick to respond, cutting earnings estimates for 1999 and 2000. Several investment banks, including

Merrill Lynch

and

Goldman Sachs

, cut ratings on Sinclair. "We would expect the shares to trade down dramatically, perhaps to

between 8 and 10, with little catalyst for much appreciation," Goldman analyst Richard Rosenstein said in a research note. (Merrill hasn't done recent underwriting for Sinclair, but Goldman was involved in a 1998 offering.)

But other analysts said the selloff was overdone, noting that Sinclair, which trades at less than 8 times its expected 2000 after-tax cash flow, is extremely cheap.

Bear Stearns

analyst Victor Miller said the stock would "overreact" to the announcement. "We would be aggressive buyers of the stock," he wrote in a note. (Bear Stearns has performed recent underwriting for Sinclair.)