After listening to the Q2 conference calls for TV station owners, analysts Bishop Cheen (pictured) and Davis Hebert at Wells Fargo Securities are looking for Q3 revenues to be up, but only modestly. The two high-yield bond analysts have a “market weight” recommendation on TV debt, saying the sector is “appropriately valued” after strong performance in 2010 and the first half of this year.
“Granted, TV has backed up with the market due to concerns about its forward vitality in a slowing economy. The industry drivers in 2011, however, still include 1) low-single-digit growth in core ad spending, as strength in other categories should help offset recent choppiness in the automotive category; 2) the loss of political ad revenue this year, although issue ad spending remains higher than historical levels in off-election years; 3) continued traction on the retransmission consent fee front, despite the elevated risk of sharing with network parents; 4) other long-term incrementals, including digital and mobile advertising; 5) low cost bases, after significant cost cutting in 2009; and 6) high leverage in the space, despite considerable 2010 deleveraging via free cash flow,” the analysts told investors.
“In Q2, TV broadcasters had a somewhat noisy quarter, underscored by mostly solid, although weakening core ad sales trends and unanticipated dislocations in the crucial auto category due to the Japanese earthquake. As a result, year-over-year comps were generally mixed, depending on the affiliate portfolio of each company and how ‘core’ revenue is measured. Some companies include undisclosed retransmission consent fees in core, while other strip out all but non-political spot revenue,” Cheen and Davis explained to clients.
How is Q3 looking at this point?
“For the most part, pacings remain somewhat positive based on a generally challenging July but perceptions that August and September bookings were improving directionally. Concerns about auto cancellations and a waning general recovery remain, however. As a result, we are expecting modest growth in Q3 broadcast revenues, tempered by flat core ad sales missing political ad activity that we believe will return next year,” the bond analysts said.
TV stations have gotten a revenue boost in recent years from the new stream of retransmission consent payments from cable and satellite distributors. However, Cheen and Hebert are cautious about the future.
“Although retrans remains a boon for most local station groups, we are coming up on the next round of retrans deals, as well as affiliate renewals, both of which have the potential to be contentious. FOX has actually cancelled some affiliations, perhaps as a warning to its rank-and-file affiliates, while NBC and ABC have offered to negotiate on behalf of their affiliates for a 50/50 retrans split. CBS has kept its negotiation strategy close to the vest,” the analysts said in their latest note to clients.