Investing In Local TV: Big Media Companies Are Doing It, Should You?

Mary-Lynn Cesar, Kapitall: On Monday, Sinclair Broadcast Group Inc. (SBGI) announced its agreement t o buy eight local television stations from Allbritton Communications for $985 million. The move is the latest in a series of aggressive local TV acquisitions from the broadcasting giant, which, according to The New York Times have totaled nearly $2 billion over the last two years (not counting Allbritton). With the Allbritton purchase, Sinclair will gain control of the company’s seven ABC affiliates, which cover 4.9% of US TV households and include the prized DC affiliate WJLA, as well as NewsChannel 8, the DC area’s sole 24-hour cable and satellite news network. This deal - if approved by the FCC - will grant Sinclair access to 149 stations in 76 markets and extend its reach to roughly 38.2% of US TV households.

[Read more from Kapitall: Economic Value Approach to ROIC May Unearth Hidden Value]

Local TV is All the Rage

2013 has been quite a busy year in the realm of local TV station transactions, with three major deals (excluding Allbritton) taking place over the last two months. Media General (MEG) and New Young Broadcasting announced their merger on June 6. The resulting company will retain the Media General name and will own or operate 30 stations in 27 markets, which cover 14% of US TV households. Later that month, Gannet Co. (GCI) shared its plans to buy broadcaster Belo Corp. (BLC) for $1.5 billion, practically doubling its TV portfolio to 43 networks. On July 1, Tribune Co. (TRBAA:OTC) agreed to buy Local TV Holdings for $2.73 billion, making it the nation’s largest commercial television station owner with a total of 42 stations.

So what’s with all the interest in local TV? Isn’t broadcast TV dead - or at least on life support? The Wall Street Journal’s Martin Peers attributes the increase in deals to the retransmission fees charged to cable and satellite operators that want to carry local TV stations. Peers writes that changes over the last couple of years have shifted retransmission revenue from cable channels to local TV stations and now larger station groups can apply their agreed upon fee terms to the smaller stations they acquire. This results in an instant increase in fee revenue, which makes local TV quite the profitable media business. Considering that the industry expects to generate $3 billion in retransmission revenue in 2013, it’s no wonder why local TV is so attractive these days.

Investing Ideas

For the following list, we decided to look for potential value investments within the arena of local TV. To begin, we constructed a universe comprised of American broadcasting-television stocks. We then screened that universe for stocks outperforming the market with a quarterly performance over 20%.

Next, we narrowed the list down by looking for potentially undervalued stocks as indicated by a low Price-to-Sales (P/S) ratio. A low P/S ratio means that a stock’s price is cheap when compared to what the company generates in revenue. When a stock has a P/S below 1, it can be considered undervalued. However, investors should note that this ratio doesn’t take expenses or debt into consideration, and variation between industries is normal. For our list we screened for stocks with P/S ratios below 2, which means that a company’s market cap isn’t more than 2x its annual sales.

We were left with three stocks on our list.

Click on the image below to see sales data over time. Quarterly sales data sourced from Zacks Investment Research.

Dig Deeper:    Compare analyst ratings  for the companies mentioned.

 

Do you think there's more upside potential in store for these stocks considering future retransmission revenue? Use this list as a starting point for your own analysis.

1. Media General, Inc. ( MEG): Operates as a television broadcast and digital company in the United States. It provides news, information, and entertainment across 18 network-affiliated broadcast television stations as well as associated digital media and mobile platforms.

Market cap at $286.81, most recent closing price at $10.46.

Performance over the last quarter at 30.10%.

Price/sales ratio: 0.80.

Media General currently owns 18 network-affiliated stations and will own or operate 30 after its merger with New Young Broadcasting.
 

2. Gray Television Inc. ( GTN): Operates as a television broadcast company in the United States.

Market cap at $447.53M, most recent closing price at $7.78.

Performance over the last quarter at 22.71%.

Price/sales ratio: 1.11.

Gray Television owns or operates TV stations broadcasting 45 channels affiliated with ABC, CBS, FOX, and NBC as well as 41 other programming channels  in 30 markets.
 

3. LIN TV Corp. ( TVL): Operates as a local television and digital media company that owns, runs, and services 43 television stations, and interactive television station and niche websites in 23 U.S. markets.

Market cap at $786.96, most recent closing price at $15.16.

Performance over the last quarter at 25.91%.

Price/sales ratio: 1.33.

LIN TV owns or operates 43 television stations and 7 digital channels in 23 U.S. markets.

 

 

List compiled by Mary-Lynn Cesar, Kapitall contributor. All data sourced from Finviz.

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