Why Sinclair Broadcast Group, Inc. Should Break Out in 2018
Sinclair Broadcast Group (SBGI) is positioned to generate a lot of forward momentum in 2018, as the company approaches the closing of its deal to acquire Tribune, enjoys the benefits of the easing of local ownership deregulation, and boosts revenue from the upcoming elections.
As for the partison background noise which I consider nothing more than manufactured outrage by its competitors and their political allies, it won’t have much if any impact on the long-term performance of Sinclair. In fact, it has helped drive down the share price to much more favorable levels for those looking for a good entry point.
Some have attempted to employ ad boycotts against the company, but they’ve been ineffective because of the decentralized, localized business model Sinclair uses.
Once the deal for Tribune is closed most of that will go away, other than the usual nibbling around the edges those on social media always engage in. The market will once again look at the fundamentals of Sinclair, and they look solid going forward.
Sinclair generated diluted earnings of $4.32 in the last reporting period. Not including the benefit from tax reform and gains generated from spectrum sales, earnings were $0.33 per share.
With the Federal corporate tax rate being slashed from 35 percent to 21 percent, the company noted it will have an instantaneous positive impact on the free cash flow of the company.
Management also stated it should be a catalyst for an increase in ad spending by “small and medium sized businesses in our local markets” later in the year. Presumably that spending, as long as the economy remains strong, should continue to be robust.
What I particularly like about that is it has the potential, with the exception of a recession, to find long-term support to its ad business under all conditions, by which I mean whether it’s an election year or not.
Sinclair generated $136 million of free cash flow in the last quarter, surpassing guidance by about $16 million. Taking into account its adjusted EBITDA to free cash flow conversion ratio, that has held at a solid 58 percent.
Excluding Tribune, the company sees the pro forma free cash flow “tightening” through the fiscal year, with the high end decreasing and the low end increasing.
Media revenue in the fourth quarter came in at $685 million, down 9 percent year-over-year. Most of that came from the cyclical nature of political advertising, which dropped from $113 million in the last Presidential election cycle, to $16 million in the reporting period.
Operating expenses related to media in the quarter were $416 million, an increase of 9 percent over the same reporting period of 2016. That included production and SG&A expenses. The boost in costs were associated with higher reverse retrans fees and new initiatives designed to increase revenue. One positive was the company said normal operating expenses were down.
Concerning its balance sheet, overall debt was $4.49 at the end of calendar year 2017, with cash on hand of $681 million, not including the “$311 million of spectrum auction proceeds in qualifying intermediary accounts.”
The company has $484 million available from its revolving credit facility. Total liquidity at the end of the year was a little under $1.5 billion.
Excluding Tribune, the guidance for 2018 was for media revenues to be in a range of $638 million to $644 million, up in the mid-single digits year-over-year.
Of that, approximately $140 million to $150 million will come from political ad spending. The growth will be a modest, coming in at the low to mid-single-digits range, primarily because of the absence of a big race like ocurred in Arkansas in 2014.
Not including political ad spending in 2017, the company grew share for the year. It specifically pointed out the 64 percent growth in its digital business as a key to its success in the fourth quarter. That was up from the 47 percent in growth for full year in that segment.
Local ownership deregulation
With the FCC approving deregulation of local television ownership, it’s considered a significant catalyst by Sinclair management. What it essentially does is allow more television stations to be owned in local markets.
The company said this:
“Such actions were long overdue and a step in the right direction to level the media playing field.”
What the new rule entails is the reinstatement of the so-called UHF discount, which clears the way for broadcasters to count UHF signals at 50 percent “toward the national audience reach cap.”
Not long after the rule change Sinclair made its bid for Tribune. Once the deal for Tribune is closed, the company will own 233 stations in 108 markets, representing market penetration of 72 percent. Presumably, over time, the company will look to other markets to increase share.
“Mandated” scripts and manufactured outrage
Since there has been a significant amount of media coverage of the “mandated” scripts the company required some of its stations to read, it is important to at least touch on what has happened in order to understand the implications for the company.
You can see the full script here if you want to see what was being read by some Sinclair anchors. Essentially it was a marketing piece that pointed out the “troubling trend of irresponsible, one sided news stories plaguing our country. The sharing of biased and false news has become all too common on social media.”
It kept hammering away, saying, “More alarming, some media outlets publish these same fake stories… stories that just aren’t true, without checking facts first.”
It finished off its message by saying that “Unfortunately, some members of the media use their platforms to push their own personal bias and agenda to control ‘exactly what people think’…This is extremely dangerous to a democracy.”
Throughout the script the company positioned itself as not perfect, but wanting to give a fair and balanced view of news events.
The response to the assertions were predictable, and blown far out of proportion than warranted. As a matter of fact, it probably did Sinclair much more good than harm, as it garnered a lot of free publicity from it, and when examining the issue, is nothing more than taunts from a rival that wants to make listeners think through the quality of the news they’re listening to.
Sinclair said in a statement when responding to the backlash, that the promotions “represent nothing more than an effort to differentiate our award-winning news programming from other, less reliable sources of information.”
The enlisting of 11 Democrat senators and independent socialist Bernie Sanders to pressure the FCC to pause its the approval process and investigate the company having the scripts read. They were rejected.
The political and corporate competitors and opposition against Sinclair have in my view, pressured the share price of the company down, to the point I think it’s a bargain at this time.
My view is this is a very temporary blip on the radar screen that will quickly go away. There is no need to be concerned about something being done to stop the acquisition of Tribune from going forward. It’s a done deal.
Once the deal with Tribune is finalized, the company should get a nice bump that should find support. Add to that the potential for acquiring more stations in local markets because of deregulation, along with the upcoming election ad revenue, and the pieces are in place for a nice boost in the share price of the stock in 2018.
I’m not as sure about taking a long position in the company, but to trade the stock over the next 6 to 9 months should generate some nice returns for shareholders.