Retrans and political boost Sinclair


Sinclair Broadcast Group declared its Q2 performance to be among the best in the industry, with TV revenues up 2.8%, largely driven by retransmission consent agreements and political advertising. And while many other public companies are sitting on the sidelines, Sinclair says this might be an opportunity for some opportunistic station buying.

Like so many broadcasters, the folks at Sinclair think Wall Street undervalues their stock. In closing out the quarterly conference call with investors and analysts, CFO David Amy noted that at the current trading price, Sinclair pays a dividend yield of over 10%, “about 10% of our net broadcast revenues through retrans are currently under contract and unaffected by the economy or advertising cycle, and again we have about $125 million of hidden value from our investments that is not reflected at all in our enterprise value or stock price.” That apparently fell on deaf ears, as Sinclair’s stock declined yesterday.

Sinclair’s Q2 net revenues from continuing operations were up 2.8% to $163.7 million. And while that was better than its peers, it was below the company’s previous guidance. Excluding political, local advertising gained 2%, while national was down 5.6%. Broadcast cash flow increased 3.5% to $71 million.

"During the second quarter, we grew our net broadcast revenues 2.8%. We believe that this growth is among the highest reported by television broadcasters and is due primarily to revenues from our retransmission consent agreements and political advertising revenues, both of which we expect to reach record levels this year. While our revenues came in below our May 6, 2008 guidance of 3.6% to 4.9% growth, this was due to the current economic conditions and their impact on advertising spending levels. In particular, we experienced a decline in automotive ad spending beginning about halfway through May, largely due to the record-high oil prices and a decline in SUV and truck sales,” said CEO David Smith in summing up the quarter.

"We are anticipating continued economic weakness for the remainder of 2008 and into 2009, which we expect to result in a slowdown in advertising spending levels. In response, we are reviewing our operating expenses and capital expenditures for potential savings or deferrals, as well as evaluating our sales incentive plans to increase the top line," Smith said. Sinclair told analysts to expect Q3 revenues to be up 2-3.4%, including $9.7 million in political revenues, up from $1.1 million a year earlier.

Unlike many public companies who are sitting on the sidelines as far as station-trading is concerned, Sinclair is not ruling out some opportunistic purchases. "The economic challenges, while impacting advertising revenues, also give rise to opportunities for us to put our cash flow and balance sheet to work in alternative ways. We believe that the depressed real estate market and tight credit markets allow us to invest in what we believe to be under-valued non-television assets to drive future cash flows. In addition to the continuation of our dividend given current capital gains tax rates and assuming the economy does not slip further into recession, we expect to pursue opportunities to strengthen our television portfolio’s competitive position, and evaluate opportunistic repurchases of our debt and common stock," Smith said.

Expanding on the idea of station buys, Amy told one analyst, “We see this as a real opportunity today – where values have come way down.” He predicted that in a few years, as investors see the returns that TV assets are producing, values will start to go up again. “Now’s a great time to be a contrarian,” he said.