Sinclair Clarifies Q4 Shortfall Brian Graney (TMF Panic)
December 17, 1999
Network affiliated TV and radio station operator Sinclair Broadcast Group (Nasdaq: SBGI) slid this morning after the company guided investors to expect poor results in the fourth quarter. Due to slumping ad sales from local and national advertisers, the Baltimore-based firm is expecting net broadcast revenues to be down 17% from last year's levels at $184 million. Broadcast cash flow will fall 26% to $91 million and after tax cash flow per share is seen coming in at $0.38, down sharply from last year's $0.66.
All three of the above performance categories were up between 40% and 60% in Q4 of 1998, but the growth was skewed by major acquisitions made by the company during the year. This year, Sinclair has been mostly focused on operating its existing TV assets rather than acquiring new ones, making the company vulnerable to a tough comparison to last year's Q4 growth. Today's drop was somewhat contained by the fact that the firm had foreseen the ad revenue slump when it reported its Q3 results in late October and most analysts had already made their downward adjustments. For the most part, Sinclair's announcement this morning simply put some numbers on the damage.
According to the Q3 earnings release, a "sharp decline" in political ads and children-related advertising at the company's Fox and WB TV network affiliates was seen hampering the Q4 results. The advertising pinch is old news for independent network operators like Sinclair as a growing number of cable channels continues to eat-up bigger slices of the national TV ad spending pie. The strategy for Sinclair is to counter this trend by making its 58 ABC, CBS, NBC, Fox, WB, and UPN affiliates in 38 markets the default centers for localized advertising.
Of course, the local Ford dealership is not going to be able to pay the same ad rates as Ford Motor (NYSE: F) itself, but going local is really the major competitive advantage that Sinclair and its peers have in an increasingly fragmented mass media marketplace. It will take time to make this strategy work, and this year the stock market has offered little in the way of patience.
Yesterday, Sinclair completed the sale of 41 of its radio stations to Entercom Communications (NYSE: ETM), making the company very nearly a TV station pure-play. But TV hasn't been a very popular model this year as other independent station operators such as Young Broadcasting (Nasdaq: YBTVA), Hearst-Argyle Television (NYSE: HTV), Belo (NYSE: BLC), and E.W. Scripps (NYSE: SSP) have all underperformed the market. Meanwhile, radio station operators AMFM Inc. (NYSE: AFM) and Infinity Broadcasting (NYSE: INF) remain investor favorites. Bucking the general trend has been large-market TV network operator Granite Broadcasting (Nasdaq: GBTVK), which has topped just about everyone with a 62% gain this year.
Investor sentiment may turn around for the TV station operators sometime down the road. After all, it was not that long ago that the conventional Wisdom hated the radio station companies, too. With its debt-heavy enterprise value equaling 27 times its trailing 12-month operating cash flow (which is distinct from broadcast cash flow), Sinclair does not seem all that cheap to new investors. Certainly, the company's presence in local markets is a very real and valuable asset. But determining where the business goes from here in a cluttered mass media marketplace is somewhat harder to judge.