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

Tickers in this article: GTN MEG TVL

Mary-Lynn Cesar, Kapitall: On Monday, Sinclair Broadcast Group Inc. (SBGI) announced its agreement to 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 Timeshave 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. (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.

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