Selloff Is Overdone, Sinclair Is A Buy

Summary

• The valuation of Sinclair against peers makes the company highly attractive.
• Though problematic, the value the market is placing on the RSNs is now below what they may actually be worth.
• Technically, the selling may be exhausted.

Before getting into the specifics of this article, I want to make it clear that despite tagging my previous coverage of Sinclair (NASDAQ:SBGI) as Bullish, I very openly stated that it was possible the stock could trade below $30 again. In fact, the title of the article was "Buying Short Term Weakness in Sinclair Will Pay Off Next Year." And here we are. We've had plenty of weakness and it's 2020. And since my main reasons for buying centered around revenue injections from political and the Super Bowl, we've yet to see that theory disproved. So, just what the heck has happened since that published piece? Confidence has been decimated and I totally understand why. EPS missed expectations, profits disappointed, and the Q4 conference call was... not great. All of those things are good reasons to sell the stock. But as we'll explore in this article, I believe Sinclair is a buy at this price.

Broadcast has been crushed hard YTD

Though the selloff in Sinclair over the last eight months has been vigorous, the sector is seeing weakness in a lot of names. Though it has lagged most of those peers year to date, Sinclair's performance has been about even with Scripps (SSP) and much better than that of ViacomCBS (VIAC). Considering what the broad market has gone through in the last two weeks, you could argue Sinclair has held up fairly well the last few sessions. Of the names in the space, SBGI (blue line) appears to be the only one to have established anything resembling a bottom.

(Source: Investing.com)

In the past, I've liked to look at metrics like price-to-book, sales, and yield. Based off those metrics, Sinclair is the cheapest of the local broadcast bunch.

	SBGI	NXST	GTN	TGNA	SSP
Price to Book (TTM)	1.49	2.61	1.16	2.06	1.01
Price/Sales (TTM)	0.53	1.65	0.81	1.37	0.64
Dividend Yield (TTM)	3.30%	1.75%	-	1.93%	1.78%

Click to enlarge

Things get interesting when we look at how the company is currently valued from a market cap standpoint against the enterprise value. Sinclair has the highest EV compared to peers, yet the market is valuing it in the middle of the pack.

(Source: Author-generated graphic, data from Seeking Alpha)

This discrepancy almost certainly comes from the regional sports networks. We'll get into those in a moment. Still, I think there might be a better way to look at Sinclair to see if the current valuation makes sense. If we zero in on the cash line of the balance sheets and compare it to the market caps as of 3/4/20 pre-market, we see one of these things is not like the others.

(Source: Author-generated graphic, data from Seeking Alpha)

What this tells us is that 63% of Sinclair's market cap is backed by its cash position. No other local broadcaster even sniffs that. This means the market is only attributing 37% of the company's value to the actual business. Does this make sense? I'm not sure it does. If we, justifiably, question the sustainability of the retransmission models the local broadcasters have built over the last few years, then there is significantly more downside potential in all of Sinclair's peers. But to be blunt, that's not why the stock has been pummeled. This price action in Sinclair is all about the regional sports networks. The market hates that asset purchase.

RSN acquisition has been a disaster

SA author Max Greve has done a terrific job highlighting the issues with the RSN assets, I won't beat a dead horse here. But I would highly recommend reading his most recent coverage of Sinclair if you haven't done so already. My take on the regional sports networks is that just like any part of a company's business, they're going to suffer if managed improperly. I don't think Sinclair is forced to take the L on this purchase just yet for a variety of reasons. And while it's very possible Sinclair overpaid for these networks, at this point I think the market's valuation of the properties is too low.

It doesn't look like DISH (DISH) subs are coming back anytime soon, and the fear now is that Sinclair could lose Comcast (CMCSA) as well. I think those fears, though valid, will ultimately prove overcautious. Mainly because it is not in Comcast's interest to have a deal fail. Comcast is in the regional sports network business too. It is imperative that Sinclair and Comcast play nice on this or Comcast could end up harming itself in negotiations over its own regional sports properties with other providers. Devaluing RSN entities would be a bad move for Comcast. Because of this, I believe an agreement will be reached.

Furthermore, I have an anecdotal story. If we a take a step back and view these RSNs through the eyes of the consumer, we might change how we value the properties. There was a classic water cooler moment happening in my office last week. Upon learning that YouTube TV was potentially losing the regional sports networks, a coworker said verbatim, "that's probably it for me with YouTube TV then. My games are the only reason I got it." Of course, there might be some hyperbole there, but it's an interesting comment. This is a person who claims to pay $50 a month just to watch his baseball games. While I suspect he is not being 100% truthful when he says MLB games are the only thing he watches through his vMVPD service, I do believe that he would cancel if the games ultimately go away. To be clear, I'm not saying that we should use this hypothetical situation to project how an average MVPD subscriber feels about regional sports networks. But I will say there is a direct to consumer component to these properties that the market is not considering. If Sinclair offered a Fox Sports app that provided his games for $30 per month, would he do it? Probably. Especially if the rest of his linear viewing consumption could be done for free with an antenna. Are there others like him? You bet. The current pay-TV structure is littered with networks that are paid for by the subscriber but that are not watched. To understand this point is to understand the fundamental reason behind the destruction of the pay-TV model. That doesn't mean all cable networks die. They just need to be nimble and they need to own good product.

If 10 people pay $50 for a vMVPD service and only 3 are watching RSNs, 7 people are unlikely to subscribe to RSNs directly. If the RSN owners were getting $8 from each of those 10 subscribers, the RSN owners had $80 in subscription revenue from 10 people. But if those 3 people who actually watched the RSNs are willing to pay $30 for them, suddenly the RSN owner comes out ahead in revenue despite a decline in subs. Again, this is completely hypothetical. But it proves a larger point, that we do not know how this is going to shake out. Streaming has turned video media into the Wild West. That is not a bad thing if you like placing bets. If you've followed any of my articles since becoming a contributor to Seeking Alpha, you'll notice a relatively common theme - I like content ownership. When the dust settles, I think content owners come out very well-positioned. The key is growing the DTC business while softly allowing the middleman distribution revenue to decline without too much pain. If you believe live sports are what is holding linear TV viewing together, RSNs might actually be a good place to be. Even if it takes a little longer to get the ROI than initially thought.

One other thought: it's easy to dunk on Chris Ripley for his insistence that legalized sports gambling adds value to the RSNs. But is he wrong? How many people are about to throw down a few bucks on a March Madness bracket? What are they going to be doing during the first four days of the tourney before their brackets blow up? Watching.

Technical Massacre

Don't focus too much on today's candle because it's intraday and we need a close to properly assess today's performance. Having said that, I view a short-term bounce as very likely from a trading perspective.

(Source: Investing.com)

Daily RSI-14 is still into oversold territory even after a few attempts to rise from the ashes. At minimum, I think a test of the downward channel top is coming in the days/weeks ahead. If that happens, we're talking about $27 per share range. Though I think it's likely the stock is back above $30 by the end of the year. For the first time in any post, I'm going to share my cost basis. I'm now holding an average of $28.25 per share in this one. And I am still confident that I'll sell for a profit after political revenue is realized in Q4 of 2020.

Risk Factors

As mentioned in my previous coverage, linear TV viewing trends are still a concern. Economic recession is bigger risk now with COVID-19 being a thing. Advertising budgets could be cut in that type of economic climate. And that would obviously be bad for Sinclair and all local broadcasters.

Additionally, cord-cutting could impact Sinclair’s bottom line to a larger degree than other broadcast station groups for two reasons. Steeper than anticipated declines in traditional pay TV services would mean declines in the market reach and ad revenue potential of all TV properties. This is an even bigger issue for the regional Fox Sports networks. Beyond cord-cutting, Sinclair is at risk of losing subscription revenue through pay-TV providers outright, DISH and Comcast being the two big concerns at this time.

Conclusion

At this point in time, your take on Sinclair largely comes down to how you value the RSNs. The market clearly has an opinion, and that valuation is far lower than what Sinclair evidently believes the value to be. Though I don't know that I value those properties as highly as Sinclair does, I'm more than willing to bet the company's number is closer to reality than the market's. Content is king, and live sports is the beautiful queen with all the power. Owning properties that provide DVR-proof content is critical, and that is exactly how Sinclair is positioned. Sinclair may have paid a premium for Fox Sports networks, but down here, I don't think long investors would be.

Analyst’s Disclosure: I am/we are long SBGI, CMCSA, VIAC. 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.

I'm not a finance professional. This is not investment advice. Please do your own research before investing or trading.