NEW YORK ( TheStreet) -- Local TV station groups are facing more pressure these days as viewers flock to standalone online video services as television advertising sales decline and broadcast networks demand higher fees to carry their programming.
So why double down on local TV?
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In the face of industry trends that point to greater digital and less old-fashioned linear television, Tribune Media (TRCO) spun off its newspapers, including the Chicago Tribune and Los Angeles Times, in August to become the country's largest TV affiliate group.
CEO Peter Liguori says he has a plan to make it work, although lately the stock has been teetering as investors express concern that the Tribune's big investments in programming may not pay off soon enough to rationalize an investment in the Chicago-based company's shares. Tribune's stock is down 33% from its 52-week high of $87.50 set in July.
The broadcaster has bulked up its TV station ownership to give it more leverage with MVPDs (multi-channel video programming distributors), and has increased its investment in businesses that are less dependent on the volatile ad market, such as its entertainment metadata company, Gracenote.
Liguori argues that the TV bundle is far from dead, and that consumers will continue to want a clear signal to their local network affiliates. Additionally, Tribune is seeking ways to profit from its various real estate holdings as well as loads of broadcast spectrum that it may not need.
"We really like the story," Chris Paciello, senior analyst at Philadelphia-based Penn Capital, which owns 227,000 Tribune Media shares, said in an interview. "We think it has a lot of catalysts."
Tribune may also benefit from higher retransmission fees, the price pay-TV operators are charged to carry local TV stations, provided that customers don't find other ways to access local television stations.
"Management believes net retrans rates can grow over the next several years and highlighted that just 60% of revenues are generated from advertising," Oppenheimer noted in a report released last week after Tribune Media convened its first Investor Day since starting to trade on the New York Stock Exchange on Dec. 5. Oppenheimer has an outperform rating on the stock with a price target of $74.
Tribune Media, formerly known as Tribune Co., came out of bankruptcy in late 2012. It has since cut down its debt from $12.5 billion to $1.1 billion, spun off its print media assets and repositioned itself as a leading TV station owner. With its $2.7 billion acquisition of Local TV Holdings, Tribune now has 42 TV stations, making it the leading TV affiliate group in the country, based on household reach.
"Until a few months ago, Tribune was known primarily as a newspaper company," Liguori said at last week's Investor Day. "Today, we are a robust media company positioned for growth." Liguori, who built up cable network FX into a major powerhouse before taking the top job at Tribune Media in January 2013, was not available for an interview.
Tribune also expanded its digital footprint, paying $170 million for entertainment meta-data company Gracenote.
Total revenue from digital and data businesses accounted for 8% of Tribune's consolidated revenue for the nine months ended September 2014, said Moody's analyst Carl Salas. While that percentage is smaller than other broadcasters, the annual run rate of more than $160 million is among the largest of Tribune's peers, he said.
"They're basically taking free cash flow from the traditional broadcast operations and investing in higher-growth revenue streams," Salas said in a phone interview. "That's what you want."
But Tribune is still getting stung by the overall decline in the TV ad market and higher programming costs.
The company gave guidance last week for 2014 television and entertainment Ebitda of $590 million to $605 million, below Oppenheimer's estimate of $634 million. Profits will be under pressure next year as the company invests in content, Tribune warned at last week's Investor Day.
Tribune also hopes it can wring higher profits over time by transforming its superstation, WGN, into a cable network. The company began that transition on Monday. The broadcaster's focus on beefing up its programming has lately resulted in two hits, "Manhattan" and "Salem."
"They are investing in original and exclusive programming," Salas said. "The initial results are positive."