Barron's 'Double or Nothing' Media Plays

In their cover story this week, Barron's identifies a handful of industries and companies where “investors who play their cards right could see big payoffs in debt-laden companies whose shares have been pummeled in recent months”.

One of the areas they feature is operators of radio and television stations, considering these levered equity plays with stocks that “could rebound sharply when the credit climate improves”.

Among their highlights to watch in radio are Emmis Communications (EMMS), and Entercom Communications (ETM), and in television, Lin TV (TVL) and Hearst-Argyle Television (HTV)- the latter being dubbed their “Safer Choice” in the sector.

Their overall levered equity pick in television and radio was Gray Television (GTN), of which they had this to say:

The well-run TV operator owns a slew of top-rated CBS (CBS) and NBC (GE) stations in small to mid-sized markets around the country. It focuses on state capitals and college towns, including Lexington, Ky.; Madison, Wis.; and Tallahassee, Fla. Gray shares ran up as high as 11 last year on LBO hopes, but they've fallen back to 6 as private equity has faded. Gray is highly leveraged with a market cap of $300 million, against debt of $900 million. "Our stock is extremely undervalued," says Gray President Bob Prather, who lately bought 11,500 shares in the open market. "Wall Street is down on Old Media and we've been dragged down by newspapers and radio. TV has some issues, but they're nothing like those industries." Thanks to political ads, Gray should enjoy a strong 2008 and it plans to use that windfall to pay down debt. If TV can hold its own in the face of the Internet advertising threat, Gray should do well.

Alas, that final comment is the big long term question- can radio and TV compete in the interactive age? Given the problems Google (GOOG) is experiencing of late with click thru ads, and the dominant long-term brands and sales relationships broadcasters have at the local level, the answer should become much clearer to the street over the next year. Broadcasters are only just now realizing returns from the interactive investments they’ve made in recent years, and are now barely scratching the surface on the exponentially growing local portion of the interactive advertising pool.

Getting through this credit crunch is the issue at the forefront of these industries for now, though, as many broadcasters are butting up against restrictive covenants. The best of breed names will survive and thrive, but there may be a few weaker hands shaken out before it’s all through.

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Disclaimer: This article reflects the individual views of Mr. Hannan and may not be attributed to any person, company or other entity with whom Mr. Hannan is affiliated.