Three Broadcast Plays Insiders Like for a Rebound

By Michael Brush
Exclusively for InvestorIdeas.com
July 02, 2008

Are the “mainstream media” finally in the last throes of a long and painful demise? Judging by recent trends at the major newspapers, it certainly looks so.

Last week, another round of newspapers announced deep job cuts as the transfer of content and advertising to the Internet plus an economic slowdown continued to take their toll.

The ongoing problems have created a lot of pain for shareholders.

• The stocks of two of the best-positioned newspaper companies, Gannett (GCI) and the New York Times (NYT) are down 62% and 37% in the past year.

• The shares of McClatchy (MNI) which operates the The Miami Herald, among other papers, are off 75% in the past year.

The stocks of major broadcasting companies have fared as badly or worse. However, I’d be fishing among the broadcasters – and avoiding newspapers – as a play on a rebound in media stocks once the economy recovers.

The reason: Insiders at broadcast companies are downright bullish, while insiders at newspaper stocks have purchased trivial amounts or nothing at all.

Why is this?

One explanation could be that television and radio still offer a compelling enough experience to compete with the Internet, while newspapers haven’t been able to figure out how to do that.

“Unlike certain other media that have seen substantial erosion to their usage by the public and significant disruption to their ad models, radio has proven itself to be remarkably resilient,” Entercom Communications (ETM) chief David Field recently told investors in a conference call. “Radio reaches 93% of Americans weekly, essentially the same percentage of Americans it has for decades.” Field also says that 36% more Americans tune in to radio every day than use the Internet.

In TV broadcasting, things aren’t all bad either. Broadcast revenue at Sinclair Broadcast Group (SBGI), which has Fox, ABC, MyNetworkTV and CW stations around the country, was up 8.5% in the first quarter. Sinclair got help from the Super Bowl, and Two and a Half Men reruns.

Radio and TV companies also tend to be cash machines. These two are no exception. And they hand out a lot of their cash to shareholders. Sinclair Broadcast and Entercom sport dividend yields of around 10.5% and 5.6%, respectively. So with these two stocks you get “paid to wait,” as the saying goes, for a turnaround.

These kinds of factors may explain a healthy round of insider buying recently at three broadcast companies. Here’s a closer look.

Sinclair Broadcast Group (SBGI)

The company: Sinclair Broadcast has over 50 Fox, ABC, MyNetworkTV and CW stations around the country.

The buying: Insiders bought $1.1 million worth of stock in the past month, including president David Smith who has a great record. On average, the stock goes up 25% in the six months after he purchases, according to Thomson Financial. That’s no guarantee the same thing will happen this time, of course.

The trends: First quarter net broadcast revenue advanced 8.5% to $160.9 million. Revenue was strong because of the Super Bowl, and syndication of shows like Two and a Half Men, and Family Guy. “These two shows are just huge home runs for us that will allow us to increase our revenue shares throughout the remainder of the year,” finance chief David Field told investors in the most recent conference call. The hit show Idol also serves as a good lead-in to the news at 10. And political spending is up, of course.

These trends helped boost television broadcast cash flow 13% to $68.1 million in the first quarter.

The company expects revenue for next quarter to grow as much as 4.9% to $167 million, thanks in part to an increase in revenue from political spending to $3.7 million, compared to $1.1 million in the same quarter last year. The company has also been seeing strength in advertising for travel and leisure, and foreign auto dealerships.

In the most recent conference call, top managers expressed frustration with low stock valuations, and said the company has had discussions about going private or buying back shares.

Entercom Communications (ETM)

The company: Entercom operates about 110 radio stations in 23 markets including San Francisco, Boston, Seattle and Denver.

The buying: Entercom Communications chairman Joseph Field purchased over $1 million worth of stock in late June. He’s also got a great record. The stock typically goes up 36% in the six months after he buys.

The trends: Net revenues at stations open for more than a year decreased 4% in the first quarter to $95.4 million. Operating expenses were cut by a larger amount, and free cash flow was up 54% to $10.6 million. The company expects revenue at stations open more than a year to decline by a low to mid-single digit percentage amount next quarter.

Entercom recently slashed its dividend to 10 cents a share per quarter, from 38 cents because, well, it was paying out too much money. By this, management means it had a dividend yield of 18% which is so high it’s considered a red flag. A very high dividend yield like that can be a sign a stock price has fallen way too much because of insurmountable problems. The company plans to use its cash flow to buy back shares, instead. Despite the cut, it still pays a healthy dividend yield of 5.4%.

Field, Entercom’s finance chief, told investors in the most recent conference call that the fundamental health of the radio industry is good. The industry added three million listeners last year, so it still reaches the same 93% of Americans that it has reached for decades. “The store is quite strong,” he told investors.

Entercom also recently announced a deal with FlyTunes to deliver its broadcast content to mobile devices.

Westwood One (WON)

The company: Westwood One supplies news, sports, music, talk and entertainment programs to radio and TV stations, and the Internet.

The buying: Insiders recently bought $296,000 worth of stock. The finance chief and board chairman who did the buying have a good record. On average, the stock has advanced 10% in the six months after their purchases.

The trends: Revenue dropped 6.5% in the first quarter to $106.6 million because of “lower audience and inventory levels, a reduction in the size of our sales force and increased competition,” says the company. Westwood One chief Tom Beusse recently said the company brought in a new “chief revenue officer” to help with efforts to improve sales.

The bottom line: Shifting trends in the media have hurt the older players. But insider buying at these broadcast companies suggests they will survive and thrive.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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