Cyber space is scrambling the way we consume data and information; the last two decades have seen the media industry separate into at least three distinct categories: cable networking, distribution and content. (Some larger companies, like Comcast (NASDAQ:CMCSA) and Disney (NYSE:DIS), remain involved in multiple areas, while others, like Time Warner (NYSE:TWX) and Time Warner Cable (TWC), have split into more focused organizations.) Broadcasters fall into the content category. In a past life, many of these companies were involved in the newspaper industry and other endeavors, some related some not. While traditional TV and cable give way to over-the-top (OTT) viewing on mobile devices, and the newspaper industry goes into sharp contraction mode, cable operators are paying retransmission fees for local broadcast programming. The latter is becoming a significant and growing revenue source. As the broadcasters reemerge in various configurations, it is probable that mergers and combinations will occur before the landscape is settled.
One such merger in progress is Nexstar's acquisition of Media General (NYSE:MEG) for cash and stock valued at $4.6 billion (including $2.4 billion of debt assumed). Media General was in transition before this combination with Nexstar (NASDAQ:NXST): it sold its newspaper business in 2012, merged with Young Broadcasting in 2013 and merged with Lin Media in 2014. It currently has 71 network-affiliated TV stations and associated digital media and mobile platforms. It will be interesting to see what the combined company looks like in terms of revenues, earnings, etc. Meanwhile, some of the metrics used to value Media General by implication may be used to compare values of related companies.
An example is EW Scripps (NYSE:SSP). The following table of metrics (using 2017 forward estimates) compares SSP with MEG and suggests the company may be undervalued at current prices. On the capitalization front, MEG is a little over twice the size of SSP, $2.2 billion market cap versus
$1.2 billion, $4.6 billion enterprise value versus $1.8 billion. (For the record, cash is not subtracted from debt to calculate enterprise value, because it is an integral component of working capital.) MEG is more levered, with debt of $2.2 billion versus $0.4 billion for SSP.
Net income for SSP runs approximately 80 percent of MEG's profit. On the plus side for SSP is a significantly lower depreciation schedule at 4.9 percent of sales versus 11.0 percent for MEG; also, SSP pays $95 million less in interest than MEG. Offsetting these SSP advantages, MEG 's tax loss carryforwards allow it to eliminate income taxes.
On the surface, MEG has a more profitable operating model, generating $23.86 of EBITDA for every $100 in revenues, versus $15.82 for SSP. But EBITDA is a tricky metric because increases in debt increase the "I" (interest) in the equation "earnings before interest, taxes, depreciation and amortization," a factor that can distort some profitability and cash flow measures. SSP's net income margin, for example, is 7.32 percent versus 6.13 percent for MEG. And when it comes to interest coverage, less EBITDA that comes with less debt trumps more EBITDA: EBITDA covers SSP's interest 32 times versus 3.6 times for MEG (EBIT is similar, 22.4 times versus 1.98 times). Not surprisingly given these ratios, debt-to-EBITDA for MEG is 6.15 times versus just 2.45 times for SSP.
Based on SSP's less levered balance sheet, it might be fair to say that the company should sell at a higher multiple of free cash flow (FCF) than MEG. If so, then perhaps the traditional valuation ratios, which give SSP's stock higher valuations, might be closer to true value than the prices derived under FCF Analysis. Consider, for instance, that SSP's FCF could extinguish its entire debt in just 3.8 years, while it would take more than twice as long (10.8 years) for MEG.
Like MEG, SSP has been in transition. In fact, since 2008 when it spun off its cable operations, the firm has gone through a series of dispositions with related accounting charges that have prevented it from achieving consistent profitability. These include the closing of the Rocky Mountain News in 2009 and the sale of United Media in 2010. In 2015 the company merged with Journal Communications and spun off the remainder of the combined company's newspapers.
This latest reorganization contributed to a loss of $66 million for 2015, including swollen charges related to the merger integration, amortization of intangibles and impairment of goodwill. A significant portion of these charges were non-recurring, and earnings are returning to the black for this year.
Using MEG's metrics to value SSP is not a perfect match. In addition to its 27 broadcast TV stations, SSP owns 34 radio stations and digital brands including a podcast business and over-the-top (OTT) news platform. In 2015, television broadcasting accounted for 85 percent of SSP's $715.7 million of revenue. In addition to local news programming, the company's stations run network, syndicated and internally produced programs. The latter, such as The List, is less expensive to develop than purchasing syndicated programs. Retransmission fees, which accounted for 22 percent of television revenues in 2015, are becoming more prominent. A new agreement with Time Warner Cable effective January, 2016 should increase retransmission fees by 60 percent, and the expiration of SSP's legacy agreement with Comcast in 2019 is expected to facilitate yet another large boost in this revenue stream.
Digital is the company's fastest growing segment, with offerings such as Newsy, its OTT service available on Apple TV, Sling, Roku and other platforms; and Midroll Media (purchased in July 2015), which creates original podcasts and operates a network that generates revenue for more than 200 shows. In April, the company acquired Cracked, a digital-media humor brand expected to have its own OTT platform. Digital sales were $38.9 million in 2015 and are running at a $46.7 million rate through the first half of this year, excluding acquisitions.
A description of SSP would be incomplete without acknowledgement of what is perhaps its most famous brand: namely, the Scripts National Spelling Bee.
While increased retransmission fees should raise revenue this year and beyond, it is important to remember that offsetting these fee increases are higher network costs associated with programming renewals for ABC, CBS and NBC. Also, on the revenue side, political advertising- now at the peak of its four-year cycle-may not live up to the high expectations the industry held earlier in the year. These caveats notwithstanding, if SSP can demonstrate a consistent return to reporting robust profit and cash flow, the investment community may be inclined to value the shares in line with its more prominent competitors, such as MEG.
Speaking of the investment community, noteworthy is Mario Gabelli's 11.5 percent ownership position. Gabelli and his investment management firm, GAMCO, also own 7.9 percent of Media General.
Summary and Qualifications:
Following several years of reorganizations wherein the company was unable to stay consistently profitable, SSP may be on the verge of generating sustainable profit and cash flow. Its strong financial position should enable management to capitalize on these results by rewarding shareholders with stock buybacks and perhaps a dividend, as well as expanding its digital media operations. Based on the valuation metrics accorded to some industry participants, a higher stock price is possible.
This report is for information purposes only and does not constitute a recommendation to buy or sell any securities mentioned. Information is taken from sources believed to be reliable but is not guaranteed and is subject to change without notice.
Disclosure: I am/we are long SSP.
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.