There's little doubt that television stocks have been on the rise lately, with the Olympics and Presidential Elections helping to boost revenues. Gray Television Inc. (GTN) shares have more than doubled so far this year, while LIN TV Corp (TVL) is up 58% and Belo Corp (BLC) is up over 15% over the same timeframe. But, automotive advertising has been the silent driver behind the rally, accounting for a significant portion of revenues for many niche stations. Wall Street may be confident in an ongoing automotive rally, but investors should exercise some caution.
Automotive advertising accounts for about 13% of ad sales at the five largest broadcasting networks, including Disney Inc.'s (DIS) ABC and CBS Corporation (CBS), while averaging about 25% of all sales for local stations and cable broadcasters in the industry. According to regulatory filings with the SEC, Belo's exposure is around 15%, Gray Television's exposure is about 20%, and LIN TV's exposure is around 30%. Such oversized exposures, particularly among smaller operators, could become concerning if the auto industry fails to impress in 2013.
There's little doubt that investor expectations are already rather high. Gray Television is trading near its 52-week high of $4.98 from a low of $1.34, LIN TV trades near its 52-week high of $13.40 from a low of $2.64, and Belo trades near its 52-week high of $9.07 from a low of $5.59 per share. While earnings multiples are far from being ultra-lofty at the moment, they include one-time advertising from the Olympics, temporary election spending and an outperforming auto industry, and investors would be wise to at least reevaluate their positions.
Auto Advertising Remains Uncertain
A late 2012 Automotive News survey found that auto dealers are studying both the size of their ad budgets and their media mix moving into 2013. Half of those surveyed indicated that they would not increase their spending in 2013, while the other half plans to add less than 10% to ad budgets for the year. Perhaps more troublingly for the broadcast television industry, two-thirds of dealers also said they would increase spending on digital, while only one-third would increase spending on traditional formats like television and print advertising.
But ultimately, auto ad spending is closely tied to the number of vehicles actually sold, since these sales provide the capital to justify the spending. While large analysts like LMC Automotive (formerly J.D. Powers Automotive Forecasting) expect the industry to sell 15 million vehicles next year - up 5% from 14.3 million this year - others like ZenithOptimedia expect a slowdown in terms of auto sales and investments, according to a TVNewsCheck survey. Investors watching for further surprises to the upside may therefore be disappointed moving into 2H 2013.
Moreover, although January 2013 sales were up 15% at a 15.3 million run rate, these sales were just in-line with Wall Street estimates. Pent up demand for new vehicles may be catalyzing higher demand, but the industry could see some headwinds from higher taxes (payroll tax increase), lower government spending, and an eventual increase in interest rates down the road. And again, it's Wall Street expectations that must be considered rather than actual performance, as these expectations may be already priced into the stocks.
Hedging Against an Lackluster Results
Investors in the television advertising industry are already riding high, with better than expected election spending and an outperforming auto industry. But, the aforementioned risks could put a damper on Wall Street's industry-of-the-year, and have a negative effect on advertising spending at television networks. Investors may therefore want to consider hedging their risk and taking some profits off the table using a number of different strategies, ranging from writing covered calls to purchasing cheap protective puts to offset downside.
Currently, investors can write the following covered calls:
- Investors looking to selectively sell a portion of their TVL position may want to consider writing Jul '13 12.50 call options trading at a 1.10 premium, enabling them to gain $1.10 per share right now, with the risk of selling at a 4.9% premium.
- Investors looking to selectively sell a portion of their BLC position may want to consider writing 10 Sept '13 call options trading at a 0.50 premium, enabling them to gain $0.50 per share right now, with the risk of selling at a 12% premium.
Protective puts are also very cheap at current levels, but may be somewhat difficult to obtain given the lack of a market in many of these companies. To this end, investors can also consider purchasing more liquid put options in automotive companies to benefit from their declines and offset the presumably related losses from the television networks.
Investors preferring non-options-based alternatives may want to simply consider taking some profits off of the table by selling some of their stake in television stocks. Or, more active investors could consider short selling some auto industry stocks to help offset declines in much the same way as buying a put option and hedge their position against potential declines in that way.
In the end, investors in television networks may have benefited from the rise of the auto industry - among other things - but taking some money off the table and/or hedging against declines may be prudent given high investor expectations.