TEGNA: A Mid-Cap Broadcast Group With A Near-Term Catalyst

| About: TEGNA (TGNA)

Summary

TEGNA is a group of 46 network-affiliated television stations positioned to capture record political revenue.

2016 election cycle political dollars will significantly impact profits.

Political revenue represents a near-term catalyst that is not factored into the stock price.

TEGNA (NYSE:TGNA) is the broadcast result of the June 2015 Gannett (NYSE:GCI) spin-off. Print assets were combined into the new Gannett and TEGNA owns the 46 television stations and associated TV web channels and digital assets such as Cars.com and Careerbuilder.com.

Large-Scale But Focused On Local Markets

Excluding the networks themselves, which do own local television stations in many markets, TEGNA is the number one NBC (NASDAQ:CMCSA) affiliate group, number one CBS (NYSE:CBS) affiliate group and the number four ABC (NYSE:DIS) affiliate group in the United States. These stations cover almost one-third of the U.S. population with more than 35 million households. Further, TEGNA is the largest independent station group of major network affiliates in the top 25 markets. Why is this important? Because many national advertising campaigns only buy the top 10 or the top 25 or the top 50 markets. TEGNA is uniquely positioned to compete for those dollars. Plus local and regional advertising business in larger markets is more robust and developed than in smaller markets.

TEGNA Network Affiliate Count

ABC

9

CBS

11

NBC

17

FOX (NASDAQ:FOX) (NASDAQ:FOXA)

3

MyNet

4

CW

1

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Consolidation has changed the television station landscape. Larger groups such as TEGNA are able to leverage their scale when negotiating and purchasing programming and equipment and often share key employee functions among stations to reduce costs. Front office tasks such as accounting and HR expense can be shared across several stations. Engineering and traffic (placing commercials in the station's programming) functions can be combined among several stations and news gathering is often shared across a region - all reducing expenses. Scale comes into play in negotiating with cable and satellite providers leveraging a station group's audience delivery to increase retransmission revenue.

Political Advertising - A Near-Term Catalyst

Political advertising dollars shattered records across the country in the presidential election cycle of 2012. Further, for a non-presidential year, records were again set in 2014. Now, given the money already flowing to candidates and Political Action Committees by both the billionaires and small citizen donors, there seems little doubt 2016 will again be record-breaking with Wells Fargo Securities estimating total spending will increase 16% over the 2012 election cycle to over 6 billion dollars.

Non-presidential local and statewide candidate advertising revenue will be strong as TEGNA has 25 stations clustered in 17 states with U. S. Senate races and six statewide races for Governor. And of course, every US Representative seat is up for election across the country this year. Even without a presidential election political revenue would be significant for TEGNA.

Presidential advertising dollars flow to so called "Battleground" states and states where the race is perceived as tight, and candidates from both political parties think there is a reasonable chance to capture electoral votes. TEGNA has stations advantageously positioned in several battleground states including three stations across two different Florida markets, and one station each in Ohio, Virginia and Colorado. In addition, part of New Hampshire is served by TEGNA's strong NBC station in Portland, Maine. Advertising revenue for the New Hampshire primary, scheduled in early February 2016, will impact year in 2015 as well as first quarter 2016.

The real money will come from PACs and so called Super PACs supported by wealthy individuals which were made possible by the 2010 US Supreme Court's "Citizen United" decision. In simple terms, the Supreme Court's 5-4 decision said that it is OK for corporations and labor unions to spend as much as they want to convince people to vote for or against a candidate. However donation limits to individual candidates were left unchanged by the court, so they couldn't contribute directly to a candidate. This led to the creation of the Super PACs, which accept unlimited donations from billionaires, corporations and unions and use it to buy advertising. As of December 26, 2015, 1,702 groups organized as SuperPACs have reported total receipts of $320 million dollars and total independent expenditures of $95 million dollars in the 2016 election cycle according to the Center for Responsive Politics.

Super PACs are not candidates ... so this business is very profitable to television stations. FCC law requires television stations to make their inventory available at the lowest unit charge to candidates (not PACs) sixty days before a general election and 45 days before a primary (and by tradition, extended to candidates for state and local office). This means candidates who used their voice or image in the advertisement were entitled to the lowest rates the station charged their best and largest advertising client during the year. Candidate advertising within that 60 day window preceding an election was often at the bottom of the rate card and not especially profitable to television stations.

But now, with Political Action Committees (PACs), stations can (and do) charge higher rates - what ever the market will bear - to accommodate increased demand on limited advertising inventory. So PACs and especially Super PACs represent high-margin business to local stations and they further benefit stations because PACs often begin advertising far in advance of the election. Television rates in high demand time periods are fluid during the election cycle...often tantamount to a perpetual auction whereby the commercial paid for by the highest bidder actually hits the air.

Local News - Highest Demand Political Inventory

It is a mistake to think prime time network commercial inventory on local affiliated television stations experience the highest demand by candidates and PACs. Instead, it is usually local news inventory that is most coveted. TEGNA stations have a huge and often dominant news presence in their local markets. And because the local station owns all the inventory AND can expand inventory (add commercial positions) to meet increasing demand, news time periods likely will be a very significant revenue generators for TEGNA (and many other) broadcast groups.

Political Revenue Largely Falls To The Bottom Line

This chart from the 2014 Gannett Annual Report (page 39) features the pro forma adjustments to a standalone TEGNA. Note the increase in revenue in 2014 compared to 2013 which came from increased political revenue and favorable retransmission negotiations and digital marketing, offset by a small drop in core advertising revenue from displaced spot advertising (local advertising the station could not accommodate due to political spot demand). $277,000 in increased revenue resulted in only $34,000 in additional total expense. This is a winning formula for the big political year of 2016!

Gannett Pro-Forma Broadcast (millions of dollars)

Revenue/Expense/Operating Income 2014 2013
Core Advertising 1,066 1,083
Political Revenue 160 22
Retransmission 366 226
Digital 98 82
Other 30 30
Total Broadcast Revenue 1,719 1,442
Broadcast Expense 948 914
Operating Income 771 529
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Is Political Revenue Already Factored In The Stock Price?

Possibly, but the price action on the stock doesn't show it. Note in June 2015 with the separation from Gannett the stock was trading in the $36 range. As early as the beginning of December 2015 the stock was in the $28 range and Friday (January 8, 2016) the stock closed at $22.77. Political revenue will be impactful, and at record levels, across 2016. I do not think record political revenue and its impact on the operating income is fully reflected in the stock price. This represents and opportunity.

TEGNA was recently honored as the "Station Group of the Year" by Broadcasting and Cable. This recognition is significant as it comes from the industry's major publication and the selection of TEGNA Media was made because of its "outstanding group of local television stations whose leading reportage, ratings, financial results and strategic moves demonstrated its exceptional accomplishments in taking on dynamic market trends". The citation goes on to discuss the efforts made by stations to connect with their local market and create meaningful content, especially with regard to local news content.

Key Drivers And Developments: 2016 And Beyond

  • Local television stations are less susceptible to so called 'cord cutting' which is adversely impacting cable companies.
  • Cars.com and Careerbuilder.com are two national-scale websites owned by TEGNA Media with strong sales revenue potential. Cars.com serves approximately 20,000 automotive dealers. From 2006 to 2013 revenue grew at a compound annual growth rate of almost 20%. Automotive advertising is generally the largest category on television stations and there is the potential for synergy and tight customer relationships between Cars.com and the local television station.
  • TEGNA Stations are deep into social media marketing with over eight million fans and followers on Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB).
  • Summer Olympics in Rio is a premium advertising vehicle which will significantly benefit TEGNA's 17 NBC affiliated stations.
  • The strengths of TEGNA's portfolio of local television stations will continue to create successful retransmission negotiations and likely increasing retransmission revenue.

Conclusion

TEGNA is well-positioned for dynamic growth. Now appears to be the opportune time to open a position in that the coming barrage of political revenue may not be fully factored in the stock price.

Even beyond the impact of the 2016 record anticipated political revenue, TEGNA is a buy because the company represents one of the pure-play network affiliated station groups in the country with the added benefit of potential revenue ramp up of their associated websites plus ownership and potential synergism of national-scale websites such as Cars.com and Careerbuilder.com.

Disclosure: I am/we are long TGNA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a professional investor. I have researched this company and found the potential investment compelling. Do your own research and make your own decisions.