As Netflix develops its own original series like House of Cards and pay-per-channel products like Roku's set-top box appear, it seems more and more like cable television may be going the way of the horse-drawn cart. However, it seems that someone has forgotten to tell this to Sinclair Broadcasting Group (NASDAQ:SBGI). With record earnings and a banner year full of high publicity television broadcasts, Sinclair seems to be in a solid position and is optimistically looking toward the future. While many Americans are making the switch to online content providers, can Sinclair continue to grow and provide value to investors?
Sinclair's primary revenue derives from station broadcast revenue, where it brought in $1.2 billion in 2013 that amounted to 89% of its total revenue. With 149 stations across the nation, Sinclair improved its broadcasting revenue by 32% in 2013 over 2012 with its primary revenue segment of local, non-political revenue up by 48%. While this may be good news for the company, its operating income decreased by $5 million and its net income was nearly half of what it was in 2012. Sinclair attributed this to $162 million in debt interest and an additional $58 million used to extinguish debt.
Sinclair's interest expense increased by 27% in 2013 over 2012, mainly because it financed the acquisitions of new stations. With the addition of $34.4 million in interest expenses for an increase of $269.9 million in revenue, Sinclair looks to be using its credit wisely. In the cash flow statement of its 2013 annual report, Sinclair reported a cash balance of $281 million and a $154 million credit line (currently unused) and a bank credit line of $200 million, which leaves it with enough of a reserve that it should be able to handle its already high debt-to-equity ratio of 788.40 and $3.8 billion of debt.
While it seems to have the ability now, it appears that management has already expressed the possibility of using further leverage or equity offerings to purchase new stations or expand the company's operations. While this has always been a strength of Sinclair's, if public perception turns against cable and moves more toward Internet content providers and online streaming, this could cause a serious problem for the company.
2014: A good year to tune in
Sinclair looks to be continuing its upward momentum into 2014, with its current operations reflecting the benefits of a political midterm election, a highly watched Super Bowl and the 2014 Winter Olympics. In its 10-Q, Sinclair reported revenue of $373 million, more than its $252 million for the same period last year, and a net income increase to $27 million from $17 million for an increase of $0.06 cents per share.
Additionally, Sinclair used its strong cash flows to purchase $82 million worth of its class-A stock. If it can continue on its current path, this should lead to another banner year for Sinclair. While certain high-priority television events have definitely boosted its earnings so far this year, the increases in profitability and return over 2013 show that Sinclair has the benefit of size and experience behind it and should be a sound long-term investment with on and off years.
How does Sinclair stack up to the competition?
In comparison with competitors Media General (NYSE:MEG) and Spanish-language broadcasting company Entravision Communication (NYSE:EVC), Sinclair seems solidly in the middle of the road. With a P/E ratio of 41.05, Sinclair seems to be priced slightly above either company even with earnings of $0.73 per share, in between Media General's $(-0.76) per share and Entravision's $1.44 per share. With a net profit margin of 4.71 and a profit margin of 19.48, Sinclair's business margins look like the strongest in the field, perhaps justifying the price premium.
However, where Sinclair really shines is in internal operations. Media General lost nearly $30 million in income from 2012 to 2013, and while much of this comes from expenses from its recent merger with LIN Media, the company still saw its operating expenses and general and administrative costs jump. Entravision looks like it could be a winner, but its internal operations show a company that also falls short of Sinclair's operating standards. Entravision's revenue increased by only $6 million from 2012 to 2013, and though it posted good numbers, these are due to the application of net operating loss carryforwards ( or NOL) of $336.1 million and $248.8 million for federal and state taxes. These will have to be paid back within the next seven years, meaning that unlike Sinclair, Entravision at some point will have to reduce its earnings to pay for this.
Don't change the channel just yet
Sinclair Broadcasting has long been an industry leader, and that does not look to change any time soon. With its expanding presence and its ability to capitalize on added revenue and high-profile real-time events like sporting events and elections, great margins and an ability to expand its geographic footprint through measured expansion should allow this company to continue its rise. While television ad revenue may cause variations in earnings over the years, investors who are willing to play the long game should see these level out and steadily rise.
Sean Dalton has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.