We spoke with Sinclair Sr. Vice President & Treasurer, Lucy Rutishauser, after the company’s 4Q13 conference call this past Wednesday. The stock had traded off roughly 30% between the beginning of the year and earnings release, before closing at $26.34 on February 12.
4Q13 was a reasonably good quarter, due in large measure to Sinclair’s local station acquisition strategy. However, management guided to lower revenue for 1Q14, largely on the impact of severe weather in key markets. We were curious to hear management affirm FY14 revenue guidance, while suggesting that 1Q14 will be lighter. Seasonal misses tend to smooth out over time, however, and the far bigger cloud hanging over the company is the potential action from the FCC to limit “Joint Sales Agreements” (“JSAs”) among broadcast TV stations. New FCC Chairman Tom Wheeler is thought to be pursuing JSAs and other similar arrangements as a means of ensuring a diversity of voices in local markets.
Speaking about the FCC threat on the conference call, CFO David Amy noted that roughly 20% of revenue “…has been reported as coming in from our JSA relationships.” Rutishauser described the stock price move as a “huge over-reaction.” We wanted to clarify how a 30% pullback in the stock price could be viewed as a huge over-reaction when 20% of revenue might be on the line, and so we spoke to Rutishauser directly, later that evening.
Rutishauser held that the market is viewing two things incorrectly. One, the broadcasters impacted by such a regulation wouldn’t be inclined to just take what the FCC mandates without a fight. Secondly, while Amy’s comment that 20% of revenue could be impacted, the market isn’t distinguishing among the wide variety of agreements. Pure JSAs, Rutishauser noted, comprise far less than 20% of revenue. In other words, even an aggressive FCC agenda might not mean that all types of co-operational contracts between Sinclair’s local stations would be threatened.
Rutishauser floated the idea of accelerating the stock repurchase program on the call – a move based on management’s sense of the stock’s severe undervaluation. Sinclair President & CEO David Smith confirmed the notion on Friday, 2/14 with the announcement of a $100 million open market purchase program. We’re often critical of management share-repurchase programs as un-imaginative, myopic investments completed at unattractive prices. In this case, we think SBGI management is making the right call and we expect that excess cash flow from the acquisition strategy will mean management’s previously stated goal of growing the dividend also remains a near term reality.
Peloton Wealth Strategists owns the common stock of Sinclair Broadcast Group. The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities. Peloton Wealth Strategists assumes no liability for losses pursuant to investment actions entered into as a result of opinions expressed herein. Changes in economic and capital market conditions and the unique objectives of each investor should be considered before investing in securities.