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From The Survey: Sinclair Broadcasting Group, Inc.
When Sinclair Broadcasting (SBGI) went public in 1995, it owned 13 stations, primarily FOX Network outlets, in eight markets. By the end of 2010, the company had grown to encompass 58 stations that it either owned or programmed through local marketing agreements (LMA). By March 1, 2013, its station count was up to 86, in 46 markets, thanks to $1.1 billion of acquisitions completed during 2012. At present, Sinclair is the largest television broadcaster in the United States (including deals closed since March and currently pending), owning , programming, or providing sales services to 149 television stations in 76 mostly mid-sized and small markets that cover about 38% of the U.S. population.
All but a few of Sinclair’s stations are ultra-high frequency (UHF – the channels above 13). Therefore, almost all customers receive Sinclair programming through cable systems or satellite broadcasters, collectively known as multi-video program distributors, or MVPDs, who pay Sinclair fees for the right to retransmit its signals. The Federal Communications Commission limits TV broadcasters’ reach to 35% of the U.S. population. But, since historically UHF stations had far fewer viewers than the channel 2-13 VHF stations, the FCC counts only half the potential viewers of a UHF station toward the legal limit. Thus, in FCC terms, Sinclair has a reach of around 22% and plenty of room to grow.
As of March 1st, network affiliations were: FOX, 24 stations; MyNetworkTV, 19; CW, 16; ABC, 11; CBS; 11; and NBC, 3; Azteca, 1; and one independent. Certain stations broadcast programming on second or third digital signals through arrangements with CBS and other networks. This year’s purchases, both closed and pending, have reduced the company’s reliance on FOX, lifting the ABC count to 27; CBS to 25; and NBC to 14, among the “big 4’’ networks. The $985 million purchase of the Allbritton properties, the major deal still to close, would add nine ABC stations, including WJLA in Washington, D.C. The deal gives Sinclair a news bureau in the nation’s capital, which will allow the company to transmit live hearings and other stories from Washington; WJLA also operates an all-news 24 hour a day cable channel, News 8, that Sinclair could use as a launching point for a local and national news service that could be carried by all its stations, incorporating news items from 101 of its stations
If we were to go back and recalculate 2012 earnings per share, pro forma for all stations owned as of March 1st and an 18-million share stock issue in May 2013, the bottom line nearly doubled, to around $1.60. Results benefited from about $125 million of political advertising in 2012, adding perhaps $0.40 a share, pro forma. This year, the added financing and amortization costs of the acquisitions have depressed results, to an actual $0.45 a share in the first half of 2013, from $0.73; cash flow per share, though, is down less, from $1.20 in the 2012 first half to $1.11 in 2013 to date. On a brighter note, same-station revenues rose about 10% in the June period, excluding political revenues. Automobile advertising remains strong, and the company expects a lift late this year from advertising related to the implementation of the Affordable Care Act. Sinclair says that synergies will help it erase the negative cash flow comparison fairly soon. Moreover, the Allbritton acquisition, which will probably close this fall, should be accretive to free cash flow per share, before any extra profit from developing News 8.
A major issue with Sinclair concerns the availability and affordability of other TV stations. On this score, the company, at least, is quite comfortable. At a recent acquisition conference call, Sinclair’s CEO breezily said he could think of around $2 billion of possible large acquisitions “off the top of my head’’, plus several hundred million dollars’ worth of smaller deals. All told, he sees at least two more years of consolidating being done by Sinclair and a handful of other companies. Financing all the likely acquisitions does not look problematic, either, at this point. The company could borrow the entire roughly $1 billion for the Allbritton stations and still likely retain its present credit ratings. Another stock issue is likely soon, as well, and should not dilute earnings much.
In sum, Sinclair should see rising earnings, and more important, cash flow, per share through not only further acquisitions but also higher retransmission and digital broadcast income. Although the stock is well over double its recent low, we think it should be of interest to growth-oriented investors. Moreover, its dividend yield is competitive, and the payout will likely rise with probable increases in free cash flow per share.
At the time of its writing, the author did not hold positions in any of the stocks mentioned.