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.