Belo Corp - Do TV Stations Still Have Value?
Belo Corp (BLC) is one of the largest publicly traded, broadcast television operators in the country. The firm owns 20 television stations, and has at least one affiliate for all of the major networks (ABC - 4 affiliates, CBS - 5, NBC - 4, and FOX - 1), as well as 2 CW and MyNetwork TV affiliates. 9 of their stations operate in the top 25 U.S. markets, and in total Belo's stations reach about 14% of households in the U.S. The firm also owns four independent local/regional cable news channels and ownership interest in a fifth. Most stations are concentrated in Texas, Arizona, and the Pacific Northwest.
The broadcast television station business is fairly simple to understand. Local stations secure a channel of bandwidth from the FCC and affiliate with a national network, giving them the ability to broadcast television shows, national news programs, and sporting events from that network. In addition, these stations usually produce their own local news programs, a key differentiator (Belo's stations have won over 100 awards for local news coverage). The vast majority of revenue - 82% in this case - comes from spot advertising. Of that, a large percentage (23%) comes from automotive advertising.
The remainder of revenue comes 2 places. The first are retransmission rights, payments from cable/satellite operators to carry the stations. The second is web site advertising, as nearly all local TV stations have reasonably trafficked web sites with local news, sports, and weather.
Belo is coming off a very strong 2012 that saw revenues increase 10% and operating profits soar 32%. We have to be careful, though, because there is a very distinct pattern here. In even years, when there are a boatload of political ads (and Olympics broadcasting), revenue and profitability peak. In odd years, absent these advantages, it troughs. Just to illustrate the point, for 2012 and 2010, Belo delivered 9.9% and 16.5% revenue increases. For 2011 and 2009, it was -5.4% and -19.5% (the latter due in part to the recession). Indeed, political advertising in Q4 was $26 million in incremental revenue over Q4 2011. Without that bump, Belo's sales would have been slightly down.
Let's briefly go through the plusses and minuses of an investment here. On the plus side, Belo pays a nice 3.6% dividend that is only 35% of free cash flow. The company raised the quarterly dividend 60% this year and paid out a special $0.25 dividend in Q4 (an additional 3% yield).
Also a positive, the firm's business model is solidly profitable. In up years, operating margin routinely exceeds 30%, but even in the ghastly recession of 2008-09 Belo still generated over 12% in free cash flow margin. We can be relatively comfortable that the firm is going to generate cash.
Now let's look at the minuses. Broadcast TV is clearly "old media". There are increasingly more ways for consumers to get the content they used to turn to over-the-air television for. All the major networks stream their shows through various mediums (Netflix, Hulu, video-on-demand, web sites, mobile apps, etc.). DVR allows consumers to skip over advertisements. All of this has contributed to less viewership and less attractive ad rates for station operators. I see this continuing, albeit at a slow pace.
Secondly, Belo's balance sheet is a little scary. Against only $9 million in cash, the firm carries over $730 million in debt and a junk rating. Operating earnings cover interest only 3.3 times over, below my minimum of 5. There is some progress being made here. Debt has been cut by $300 million over the last 3 years, and Fitch recently changed its outlook to positive. I don't see the debt situation as a major existential risk, but it does limit how much cash flow is available to return to shareholders or invest in growth.
Ultimately, it's the value that matters here. I see a continuing pattern of alternating up-and-down years here, normalized to mediocre 2-3% growth over the long term. Given that, and a well-defined historical valuation range, I see Belo worth about $10.50 a share. That's 20% upside, but I don't see BLC as one of the more attractive Magic FormulaŽ Investing (MFI) choices at this point in time.
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