A Renaissance in Local TV
10/29/2013 8:00 am EST
Our latest Focus Stock is one of the largest TV broadcast companies in the US. A series of acquisitions over the past two years has more than doubled the number of stations the company owns, as well as its revenue and free cash flow, notes Westcott Rochette of S&P Capital IQ in The Outlook.
Assuming all of its announced mergers are completed (as we anticipate), Maryland-based Sinclair Broadcast Group (SBGI) will soon own or operate some 162 stations in 77 markets that, together, reach about 40% of US television households.
In addition, Sinclair will be the largest affiliate group in terms of stations for the major networks of FOX, CBS, and ABC, and the fourth-largest NBC affiliate.
Sinclair's acquisitions have brought the company a leadership position in the local broadcast industry where we believe fundamentals are improving markedly.
Strategic and investor interest in local TV operators has increased materially in recent years, reviving a seemingly sleepy industry thought to be fairly mature.
There has been a renaissance of sorts in local television over the last two years, with both market activity, and valuation expansion, expanding materially in 2013.
In a changing advertising landscape, TV remains an effective medium to reach a broad audience and still garners its share of advertising dollars.
Local TV specifically, is one of the few avenues to reach a hyper-local audience, where the message can be tailored to fit a specific market.
Retransmission fees—the fees paid by cable and satellite TV providers to include local broadcast signals—are rapidly becoming a meaningful part of the earnings stream.
Also, the huge ramp of political advertising spending tends to filter through local TV broadcasts. It is the most effective way to reach low-interest voters, in our view.
The 2014 mid-term elections are setting up to be another contentious political season, with control of both the House and Senate up for grabs.
In addition, 2016 appears poised to greatly exceed the 2012 spending records, with two open primaries, and Republicans and Democrats vying for the White House.
We believe Sinclair is poised to embark on the next leg of its evolution, as it shifts from rapid consolidation mode to integration and execution.
In our opinion, investor appreciation of the longer-term margin and revenue opportunities stemming from its stronger distribution platform and geographic reach, will support another round of multiple expansion and share price appreciation.
Sinclair Broadcast Group carries S&P Capital IQ's highest investment recommendation of 5-Stars or strong buy. Our 12-month target price is $40 per share.
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