Gray Television (GTN) is a television broadcast company which owns and operates television stations broadcasting 40 primary channels and 45 secondary channels in 30 television markets. 19 channels are CBS affiliates, 10 are NBC affiliates, and 9 are ABC affiliates. GTN's fourth quarter earnings ending December 31 will be released in about a month. Here's 5 reasons to be bullish on GTN now ahead its earnings report and beyond.
1. GTN guided for a very big quarter primarily due to ad spending across its networks that "earned significantly more political advertising revenue than previously anticipated." GTN is estimating record political ad spending in Q4 of between $85 and $86 million, beating the previous company record of $57.6 million in 2010 by over 47%. This will bring full year 2012 total revenues to over $400 million compared to the previous record of $346.1 million in 2010. Average analyst estimated EPS is .47/share for Q4 and .91/share for the year. 2013's average EPS estimate of .27/share. Since the political ad spending cycle is a 2 year cycle, it's a good idea to combine the two years and get and get an average to calculate the estimated runrate. 2012 averaged with 2013 yields an estimated average EPS of .59/share, quite high compared to the share price of $3.31 for GTN as I write this. I expect 2013 estimates will get raised and/or beaten as well.
2. According to GTN's most recent conference call, 50% of its sales and profits come from local car dealership advertising. GTN states: "our core business has been so good this year led by automotive and that continues to be the #1 driver for the television business" and "auto for November and December appears to be pacing very strong at this point."
The bigger the sales for automobiles, the more resources and financial incentive dealerships have to purchase more television advertising at bigger rates. According to CEO Robert Prather, there's 3-4 years of pent-up demand for cars, the banks are seeing very little in the default rate, and it's therefore expected that credit available and lending for cars will continue to expand. Strength in the car industry can be easily confirmed by peaking at Ford (F) and General Motors (GM) as both companies have been showing higher sales and profits at levels not seen since before the collapse of the financial markets in late 2008. Investors have bid up the market values of F and GM significantly. As investors take their profits and look for other areas to invest in the car industry boom, GTN may become an interesting alternative, undiscovered angle.
3. Other media companies are reporting similar strength in the areas of political and car ad revenue which adds credibility to GTN's claims. According to on analyst estimates, CBS Corporation (CBS), is on track to deliver record Q4 and 2012 results. In CBS's most recent conference call, its CEO stated "automotive, which is our biggest category, continues to be very strong, and TV station pacing is accelerating overall." Excellent sign for GTN, especially since several of its stations are CBS affiliates. Radio One (ROIAK) as well saw record political revenue in its most recent reported quarter. Although ROIAK is radio, not television, it does further confirm that political ad dollars flowed strong to traditional media sources. Just like F and GM, CBS and ROIAK investors may end up becoming naturally attracted to GTN upon learning of their Q4 results.
4. GTN had several press releases detailing the refinancing of its debt. Buried in the Q&A section of its most recent conference call, the company revealed "at post refinancing, with the new structure out of the box, annual interest cost would be about $49 million." This is around $10 million in annual cost savings, more than .17 per share (pre-tax). Its cash balance at September 30 was mentioned at $35 million or so more than needed and would be used to pay down its debt. This will lower interest expense and raise EPS even further. I wonder if analysts included this in their estimates? I suspect they did not considering their estimates have stayed stagnant for some time. I would add at least .16 post-tax EPS to the average EPS estimate above (of .59 EPS) runrate by the end of 2013 for an average runrate of .75 EPS. A conservative PE of just 10 would be more than a double versus the current share price.
5. Possible short squeeze? With GTN printing new 2 year highs, shorts must be feeling the heat. The last reported short interest was 1,415,500 with short ratio of 7.9! Shorts may be in trouble. Interesting to note that short interest peaked at the end of May 2012 right around where the bottom was. Short interest has since come down significantly along with the price rise. Shorts have been getting squeeze already ever since, and that might continue.
Despite all these positives, GTN carries with it significant risks. I'll name the four most important ones in my opinion. One, its business is sensitive to the economy. If the economy takes a dive its recent success could go into reversal and hurt it (and shareholders) significantly. Two, odd years with no political ad spending are always more challenging as rates and volume for advertising across their networks isn't as strong. 2013 is a non-political year so sales and EPS will be down over 2012. The market may not be as willing to value the overall cycle as quickly as I personally do. Three, the media culture is constantly evolving and could change for the worse for GTN. Will new technologies change the way we watch TV and, along with it, the ad spending opportunities? Finally, and perhaps most importantly, with the stock trading at 2 year highs there is high risk of profit-taking pullbacks and any even mildly bad news could send shares downward faster than you'd normally expect with a stock otherwise.
Disclosure: I am long GTN.