We see three key themes that point to a positive year for the broadcasters: delevering, regulatory/legislative reform and a positive outlook for the core business. Despite the recent run in the stocks, valuations remain reasonable in our view. We're taking our price targets for the TV broadcasters up and see 20%+ implied upside to the stocks in our broadcast coverage universe (Sinclair Broadcast group SBGI, Gray Television Inc. GTN, Townsquare Media Inc. TSQ).
Theme #1: Delevering could Drive Equity Accretion
While 2016 political revenue was generally weaker than anticipated, the companies should still generate substantial free cash flow. Management commentary suggests that the broadcasters in our coverage will look to de-lever to varying degrees. Our analysis suggests that this de-levering could drive ~20% accretion for SBGI/GTN and 25% accretion for TSQ in 2017. This assumes that current multiples hold, which we think is reasonable given valuations are currently undemanding and our positive outlook for the industry.
Theme #2: Easing Ownership Rules Could Reignite M&A, Tax Reform Could Boost FCF
We see a couple of key regulatory/legislative catalysts for the group. As we move through 2017, we believe liberalization of ownership rules – particularly a reinstatement of the UHF discount – could boost accretive TV station M&A, which is a positive for the group. And, we believe that tax reform could structurally boost FCF as well as EV/EBITDA multiples.
Theme #3: Core Business Could Inflect Positively
Third, the outlook for the core business is positive. Improving small business sentiment could drive a better core ad environment. The NFIB Small Business Optimism index increased 3.7% month/month in November 2016, the highest growth rate since April 2009. Since 2007, the 98.4 monthly result has only been higher once (100.3 in 12/14). On retrans, company guidance suggests net retrans growth should remain solid in 2017, particularly for GTN. And, channel checks suggest industry-wide retrans renewals are on track for another strong year.
Valuations Reasonable, Raising Target Prices on TV Broadcasters
Despite these positives, valuations are undemanding and are currently in-line to only slightly above long-term consensus averages (SBGI at 8.3x, GTN at 8.3x, TSQ at 7.7x). All told, we're raising our price targets for SBGI and GTN as we roll our valuations forward to 2017/2018E from 2016/2017E and tweak our multiples higher to reflect the positive outlook for the group. We now apply an 8.5x target multiple for SBGI/GTN, up from 8x previously. (We've also tweaked our 2017/2018 SBGI estimates modestly 1-2% higher). Our price target for SBGI moves to $43 from $36 and for GTN goes to $14 from $12. Please see pages 9-10 for details of the price target and estimate changes. We're maintaining our Outperform ratings on SBGI, GTN and TSQ. Our preferred name is SBGI as we see the company having the most exposure in our coverage universe to the three positive trends we see for the group.
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