Wells Fargo analyst Marci Ryvicker says a lot of people are asking the firm what it thinks about the prospects for broadcast television as an investment. She is more than enthusiastic, saying that the free cash flow prospects are “extremely compelling.”
Ryvicker ticked off several reasons for enthusiasm:
* Healthy advertising trends
* Prospects for continued growth in retransmission consent income
* Continued strong spending in the political category
* Quantification of the value of TV spectrum as a side effect of incentive auctions
* Excellent free cash flow generation
Ryvicker focused on the latter of the positives, which persist despite “cloudiness” on the M&A front. She said that certain television groups in particular stand to make significant strides on the FCF front, including Nexstar, LIN and Sinclair.
She also said that despite secular challenges, business prospects are actually stronger than they were pre-recession, fueled by the uptick in retrans income combined with a stable advertising environment. She credited automotive and telco business with bringing stability to the latter.
She added that groups have been stabilizing their balance sheets – as income has increased, debt has been paid down, resulting in an overall decrease in leverage despite an uptick in M&A activity.
“FCF characteristics remain compelling,” Ryvicker wrote. “With stable ad trends, yr/yr growth in net retrans, healthy balance sheets in our view, and a slew of M&A, it is no surprise that broadcast FCF has more than doubled in absolute dollars since the recession.”
The prospect for dividends and share repurchase programs contribute to the potential upside for investors, she concluded.
RBR-TVBR observation: Do you think this confirms the view recently expressed by Preston Padden that there are not likely to be any network affiliates rushing to participate in the FCC’s incentive auction program? Nobody is going to trade off strong growth potential for a one-time windfall of unknown value.
