Analyst Downgrades Station Stocks On Regulation Worries

Ryvicker says restrictions on joint sales agreements could lower earnings
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Analyst Marci Ryvicker of Wells Fargo Securities has downgraded the stock of broadcast station owners because of concerns that the government might tighten regulations on the industry.

“While we continue to really like the broadcast TV business due to strong advertising fundamentals (both core and political), robust free cash flow, and the narrowing of the gap between retransmission consent and cable affiliate fees, we just came back from a day in D.C. (3/14) and can't help but feel incrementally negative on the regulatory environment—especially as it relates to pending and future [merger and acquisition activity],” Ryvicker said in a report released Monday.

Companies including Gray Television, Nexstar and Sinclair have acquisitions in the works, and restrictions that might prevent joint sales agreements and other “sharing arrangements” have led her to cut her estimates for those companies.

“We also think it will be much harder for these stocks to achieve the multiple expansion we previously anticipated, leading to lower target multiples, lower ranges … and our downgrades to Market Perform,” Ryvicker wrote. She also downgraded LIN Media.

“It's difficult but there could still be plenty of positives,” she said. “We still really like the business, but believe regulatory environment will remain an overhang. We could be positively surprised by the ultimate treatment of waivers; deals might get through post examination; STELA so far seems fair; Congress could step in; M&A could continue albeit at a slower pace; quadrennial review could loosen certain rules; and again we highlight the potential for significant capital returns.”

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