Auto Dealer Outlook: Stable Spot TV Ad Spend -- RBC Capital Markets

#1. Dealer budget outlook okay. Checks suggest a slowdown in sales is not unexpected and many dealers have been bracing for this for over a year. The consensus view was there may be modest near-term cuts as advertising is typically budgeted on a unit basis.

#2. TV, digital the keystones of dealer media mix. In most markets, spot TV and digital were said to be the key media for dealers and the two have a complementary relationship. There is some variability based on market size and average age as well as dealer strategy/size. But, checks generally saw local TV as the dominant way to build brand awareness for a dealer. While digital continues to gain share, TV is the "stimulus that drives digital." Moreover, in an increasingly fragmented media ecosystem, the reach/frequency that TV provides is difficult, if not impossible to replicate using only digital.

#3. Spot TV spending appears stable near term. Our contacts generally thought that if there were modest dealer budget cuts on slowing ad sales, TV spending should hold up over the next couple of years as cuts would likely come from non-digital/TV sources. (Industry data suggests non-TV/digital account for 42% of dealer spend.) However, this does not suggest spot TV spending is expected to grow meaningfully. Generally, TV budgets were said to be flat to slightly up on rate increases due to a stronger economy.

#4. Uncertainty over the future. All of our checks said it's extremely difficult to predict the optimal media mix five years out, particularly after changes over the past 2-3 years. Not surprisingly, digital agencies were much more bullish on digital. However, all expected digital would continue to gain share, although, as discussed above, most is expected to come from traditional media other than TV. The eventual long-term shift from TV will depend on several factors, particularly the speed at which TV viewing habits change (shift to OTT, ratings declines, etc.) as well as the ability of station groups to develop attractive digital offerings.

Overall ad trends stable but some lumpiness in 3Q. Broader ad checks suggest a modest improvement in 2Q relative to 1Q, in line with our estimates. It's early for 3Q and visibility is limited given the holiday (normal seasonality) and Summer Olympics comps (advertisers tend to book the Olympics earlier than normal). Visibility is expected to remain limited through August because of the Olympics and could make pacings look light for 3Q. However, contacts suggest tones of discussions point to modest improvement in 3Q relative to 2Q.

Continue to like the group. While broader media concerns prevail, stable ad trends reinforce our positive view on the group. With FCF yields now ~20% and potential easing of local market ownership rules, we continue to like the group, with Outperform ratings on SBGI, NXST and GTN.

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