Broadcast Sector: Improved Profitability, Undervalued Stocks

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Although TV stations continue to report hefty financial gains in recent periods, broadcasters are still trading below the stock market as a whole. "The sector appears undervalued by around 15%," says Michael Alcamo, president of New York-based media investment company M.C. Alcamo & Company.

In fact, Alcamo was a bit shocked looking at the results versus a year ago. "The results surprised us -- trading multiples were significantly lower than the year previously, possibly reflecting investor caution or uncertainty," he notes.

Looking at six pure-play publicly traded broadcast TV station companies, Alcamo says selling cash-flow multiples (earnings before interest, depreciation, taxes and amortization} are down 20% from a year ago at the end of 2010 -- currently at an 8.7 times rate, versus 10.7. Cash flow multiples are down 10% from a 9.6 number three months ago.

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The six companies include Belo Corp., Gray Television, Nexstar Broadcasting, Sinclair Broadcast Group, LIN Television and Fisher Communications Group. Analyzing an index of these companies shows stock prices at a 53% index to the S&P 500 Index of 98%.

This group posted $113.6 million in incremental revenue in third-quarter 2010 -- 19% over third-quarter 2009, and $81.8 million in incremental EBITDA.

At the broader integrated media companies -- those with other assets, such as magazines and newspapers -- it's the same story. Those stocks are down 25% to a 6.1 cash flow multiple from an 8.0 number -- although Alcamo says things improved for these companies a bit at the end of the third quarter.

Overall, he says, "investors remain cautious -- despite improved rising profitability, improved credit profiles, a good outlook for 2011, an exceptional outlook for 2012, and audience trends all pointed in the right direction."

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