A Far-Right Cornucopia

In the aftermath of Pax Americana, embarrassed to death by the folks who think such Mexican lingo is why America’s no longer great, a good circus can make a lot of bread. To say nothing of 173 of them, which is how many local broadcast stations Sinclair Broadcasting Group (SBGI) owns or controls in 81 U.S. media markets.

I use ‘circus’ advisedly, because much of what passes for local TV news – the relentless parade of random crimes, fluff offered as politics and business coverage, sensationalist claptrap saved for rating sweeps weeks – isn’t anything Edward R. Murrow or Walter Cronkite would recognize as journalism. But they’re not on TV anymore; this guy is.

And so’s Sinclair, grown from a single Baltimore UHF station into the largest broadcaster in the country by dint of nonstop acquisitions and extreme partisanship.

Let the polite mainstream press call Sinclair’s ideology conservative. I’ll call it what it is: straight-up authoritarianism, delivered ham-fistedly and yet extremely profitably.

Since there’s really no discussing this company out of its political context, let’s get that out of the way before getting to the good part about why the stock’s such a sweet deal.

News flash: requiring every station to run a daily Terrorism Alert Desk segment hyping violence and perceived threats from around the world isn’t news that “empowers and informs,” as Sinclair claims. Neither is promoting kooks with crackpot insinuations about Hillary Clinton, Democrats and the KKK as 2016 election coverage. Neither is mischaracterizing federal broadcast ownership restrictions in one’s annual report.

Stop the presses: not covering a criminal complaint alleging that your home-state congressional candidate assaulted a reporter isn’t bringing the viewers “news they can trust.”

But this is just more of the same. GQ was writing about “How Sinclair bent the rules, bought politicians and faked the news” 12 years ago. So when Jared Kushner claimed that Donald Trump’s campaign traded access for favorable coverage from a company chaired by a huge Trump supporter I knew it was just Jared being Jared, as Sinclair helpfully confirmed a few days later. As if Trump ever needed a quid pro quo from a media entity poised to challenge Fox News from the right.

As a proud liberal and even just as a human with a brain I find Sinclair’s shtick – right down to impugning its critics as fake news propagators – irredeemably repugnant. But as an investment analyst I must concede that it’s been part of a winning formula.

What Sinclair understands best isn’t the electoral horse race, although it isn’t shy about trying to hurt the ponies it has bet against, from John Kerry to Clinton. It gets the sumo wrestling match between broadcasters and cable operators, where size is as much of an advantage as agility. Politics plays into this because only Republicans are willing to permit Sinclair the size and the market power it craves and, well, you can probably connect the dots from there.

Right now, Sinclair is trying to connect them on its pending acquisition of Tribune Media (TRCO) for $3.9 billion in cash (plus $2.7 billion in assumed debt). The deal, announced last month, would give Sinclair 233 stations with a presence in roughly half domestic TV markets reaching nearly three-quarters of Americans.

This is at odds with current Federal Communication Commission rules limiting the reach of local broadcast chains, but the FCC’s new Republican chairman has signaled clearly that these are on their way out. And that will leave Sinclair in an ideal position to continue squeezing couch potatoes by jacking up the so-called retransmission fees, paid by cable and telecom operators for the right to carry local broadcast signals on their systems.

Retransmit fees have escalated rapidly in recent years, making up more than a quarter of local broadcasters’ revenue. They’re expected to keep it up, increasing 25% over the next four years by one estimate.

It’s not hard to see why. Say you own the Fox network affiliate in Green Bay, as Sinclair does, which means it controls local distribution of most games played by the National Football League’s Green Bay Packers. In the event it can’t reach a retransmission deal with a local cable operator, it has the right to withhold its signal from that operator’s customers. In that case Sinclair would lose viewers, sure. But the operator would lose most Packers games, flooding its call centers and risking an exodus of football fans to, say, DirecTV, or into the brave new world without a single paid TV subscription.

For cable operators it’s all about hanging on to their customers, and control over must-have programming like live sports is a way to capitalize on that leverage. Tribune stations broadcast the Cubs in Chicago and the Yankees in New York, by the way.

The Tribune deal would also give Sinclair additional leverage in negotiations with Fox over the programming fees that rival charges, since Sinclair would  own 28% of Fox’s national affiliates. And speculation persists that Sinclair could challenge Fox and others with its own right-wing network featuring some familiar faces.

Now, none of this would be worth a hill of beans if Sinclair wasn’t bringing in the advertising bucks that still account for nearly three quarters of broadcaster revenues. But it is, and the tide of political advertising rising with each election cycle isn’t the only reason. Sinclair has also shown a flair for selling local ads using sophisticated marketing techniques that unearth many aspiring Jimmy McGills.

And then there are the juicy cost savings from axing long-serving anchors, entire investigative reporting teams and other bottom-line drains at the acquired stations. They get replaced with propaganda shorts distributed from the corporate headquarters. Recently these have included “Bottom Line with Boris” advertorials by Sinclair’s new chief political analyst. That would be recently departed Trump aide Boris Epshteyn, the short-tempered Russian immigrant with an assault conviction who’s also embroiled in the House Intelligence Committee’s probe of Russian interference in last year’s election.

In an age when more and more TV politics viewers just want the spin from “their team,” appealing to Trump’s hardcore following makes great commercial sense. That’s maybe 30% of the viewership with, to put it kindly, a limited use for facts and a huge desire to have their opinions validated. In local media markets that remain diverse despite Sinclair’s best efforts, extremism is a proven eyeball magnet.

But enough of this fuzzy social science and media claptrap. Make America pay higher cable fees and Boris’ lawyer bills doesn’t fit onto a hat, regardless. Instead, let’s talk cold hard cash, which is the only thing we’re after in this cesspool.

Cash flow from operations jumped 47% in fiscal 2016, on a 25% increase in revenue. Only about half of the revenue gain was attributable to newly acquired stations and election-year advertising.

That allowed Sinclair to buy back 8% of the equity float at an average discount of 20% to the current price. Add the dividend currently yielding 2% and the company returned almost 6% of the current market cap to shareholders over the last year.

Later this year, Sinclair will reap a windfall amounting to roughly half of last year’s operating cash flow from the done sale of some of its spectrum to wireless carriers.

Given the company’s and the stock’s long record of outperformance, I really should have included it last week in the rundown of my recently favored portfolio recommendations even though Mom doesn’t own this one yet.

Does it bother me to be recommending Sinclair shares knowing that the company promotes abhorrent political views? Not really. If you agree with me politically, look at it this way: every dollar you earn from Sinclair is a dollar that can be spent opposing its message. Donate it to a suitably worthy cause. But someone else will own those shares if you don’t and a politically-motivated boycott is highly unlikely to move the needle here.

This thing is never going to get a significantly higher market multiple given the long-term political risks involved as well as the tendency to acquisition rollups to roll down eventually. Local broadcasting remains at risk of further disruption by the Internet, mobile, social and other technologies. But for the moment Sinclair remains a cheap and promising cash cow thanks in part to all the fertilizer it spreads across the airwaves.

 

Stock Talk

William C.

William C.

Igor, your political rant on Sinclair is pathetic. I would have expected better from you but it appears that like all “Good Liberals” your contempt and vitriol shows no limits. I was sorry to learn that, as you imply, since I am a conservative, I lack a brain.

It is interesting that Liberals don’t show the same amount of “in-depth” analysis when reviewing companies with liberal political agendas like Facebook, Google, GE, Costco, Progressive Insurance, Disney, etc., etc., etc. These companies aren’t even honest since their agendas have nothing what-so-ever to do with their products — just plain in-your -face intolerance for anything that doesn’t align with their corporate culture set of beliefs.

You will probably be saying goodbye to my $400 per year subscription.

Igor Greenwald

Igor Greenwald

I’m sorry you took this personally, and of course you’re entitled to your opinion and your politics. I don’t intend to share my political views in this newsletter often, but for a company like Sinclair, the politics is integral to the investment case. In any event, thank you for your business.

Robert 111

Robert 111

William,

I hope you will hang in here with us. I think Igor could have just said that Sinclair has a very strong conservative following and left it at that. I don’t think that expression of political viewpoints in a way that is offensive to opposite points of view is helpful. Also I don’t want this to turn into a political forum. We get enough of that on TV from both sides.

Let’s respect each other

TT

TT

Igor,
I AGREE with William C. I find your political comments INAPPROPRIATE for something that I am paying to receive. I am only interested in your views of what we should be buying or selling. Based on your political tirade I’m not sure that I am interested in your opinions for finance either. I can get your type of uninformed political views FREE from television. I would say that conservatives are a lot more intelligent than you on the far left think. Please stick to providing financial advice and leave the politics discussion out of your columns!!!

Igor Greenwald

Igor Greenwald

I’m sorry you were offended, TT. As noted in response to the prior complaint, I do expect to avoid gratutitous political commentary in the future. The point I was trying to make here is that SBGI looks like a great investment (albeit a risky one) despite my complete rejection of everything it stands for politically. So I guess you know I won’t let my politics affect my investment analysis and recommendations.

Guest

Guest

I’d be willing to bet there are more right leaning investors here than left, for obvious reasons. This one was tough to read through. I think it’s best to be leaving your politics out of articles going forward. If you want to stay in business that is.

Igor Greenwald

Igor Greenwald

Hmm, tempted to take that bet. But a genuine thank you for the feedback and your business in any event, and as noted elsewhere I won’t be writing about a company like Sinclair often enough for this to come between us, I hope.

Terry Stembridge

Terry Stembridge

Igor, I suspected you were probably a liberal, but wasn’t sure and didn’t really care. You hid it pretty well when talking about oil and gas. I am the fool for taking fossil fuel advice for so long from a “proud liberal.” I will not anymore. There are much cheaper ways for liberals to insult my intelligence. I can just watch the news. Your contempt for conservatives is very deep. I am cancelling.

Igor Greenwald

Igor Greenwald

Thanks for reading my stuff, Terry, and best of luck.

Raoul Simon

Raoul Simon

I’ve been away from my desk since early July. I just now read this piece. As an investor I am interested in opinions and analysis on companies and their ability to SHOW ME THE MONEY! As a conservative, I can’t say I agree with your politics, nor the vitriol you used to express it. Now it is 4 1/2 months later, and the revelations coming out about Uranium One and the DNC scandals [of which a new one seems to appear daily] would seem to indicate that Sinclair is not as far off the mark as you suggest. I believe it is career suicide for celebs to spout their political opinions even knowing, and not caring, that they will alienate a good portion of their audience. Perhaps a few millions in the bank insulates one from many of the realities of life. May I suggest you not be one of them, and stick to finances? I won’t bail unless the place becomes too toxic for me.

Ari Charney

Ari Charney

Hi Raoul,

I couldn’t agree more that we’re here to provide you with investment analysis and recommendations, not personal political opinions. Although Igor clearly strayed from that mandate in this article, most subscribers in the thread below respectfully pointed out that this is not what they’re here for and, therefore, he ultimately took their feedback to heart.

To the extent that we touch upon the political realm in the future, it would be marked by a dispassionate analysis of how political processes or regulatory oversight might help or hurt our investments. Here, again, we would have no rooting interests except how to help you make money.

Best regards,
Ari

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