Medias millennium malaise

Granite is hit hard, but 2000 has been tough year for stagnating stocks on Wall Street

The second quarter was particularly tough for Granite Broadcasting. At a time when WB stations around the country have been realizing double-digit revenue growth, Granite's WB stations showed a 1% decline in revenue.

Same-station broadcast cash flow dropped 17%. The day after releasing results on Monday, July 31, Granite's stock dipped to a yearly low of just under $4.72 per share, where it continued to trade for much of last week.

It has been a tough time in media-land this year for cable and broadcast sectors; last week, it was just Granite's turn.

Company executives knew there would be some rough questions from analysts on a conference call to discuss results. But they had to be surprised when Omega Advisors' Lee Cooperman asked pointedly if Granite executives would just sell the company so that investors could get some return on their shares and take advantage of the huge discrepancy between Granite's public and private valuations. Granite's breakup value is estimated by analysts to be $20 a share or greater.

The question, coming from such a widely respected investment-funds manager-known for buying long term-in such a public setting was clearly a slap at Granite's management. "It was more than a rude guest at a wedding," quipped one analyst on the conference call. "It's rare for an investor to ask a sensitive question like that on the earnings call. Usually, those kinds of discussions are held off-line."

Cooperman was clearly expressing his frustration at what he feels is a less than adequate return on his stock in Granite, which he first purchased in 1992 when the company went public. Neither Cooperman nor Granite TV Chairman Don Cornwell could be reached for comment at deadline last week.

But frustration sums up the feelings of many media company executives and investors with respect to non-network-TV stock prices, which have been in the slow lane for more than 18 months. And the outlook for the next 12 to 18 months isn't any rosier because investors just don't see from where future revenue growth is going to come.

"We've only participated in TV when we've absolutely had to," says Larry Haverty, the entertainment and media analyst at State Street Research, the Boston-based investment concern. The best example of that is Viacom and CBS, in which State Street has owned shares for several years. "We were really more interested in the radio aspects of CBS," he says. "The TV turnaround was a bonus."

Hearst Argyle issued what most analysts said were pretty solid second-quarter numbers two weeks ago, including a 10% gain in broadcast cash flow, to $98.5 million, on a 6% climb in revenue, to $196.5 million. Pro forma revenue was up 6.5% for the first six months while broadcast cash flow was up 13.5%. Not bad, and yet its stock price is trading at about $19, just above its 52-week low of $18.75. The stock has dropped about $10 since January.

"We think we have a pretty good story to tell, but the stock just isn't moving," says a company source. "It's very frustrating."

Executives at Tribune and Gannett, two of the biggest TV-station owners have also watched their stocks hover near 52-week lows, despite fairly positive earnings growth this year. Tribune was trading around $33 last week, just above its yearly low of $30.81, despite posting double-digit revenues and profits in its broadcasting sector in the second quarter.

Gannett's stock has been on a steady decline since March and last week traded at $53.75, not far from its yearly low of $52.87. Last December, the stock was trading at $83.75. The company's newspaper results have far outshone its broadcasting operations so far this year. In the first half, broadcast operating income was up just 2% to $168 million on revenues of $372 million, up 4.6%. Newspaper income is up 19%, to $677 million, on revenues of $1.8 billion, up 21%.

Belo watched its stock drop from $20.50 last September to $12.31 on Feb. 25, and executives there have been obsessed with raising it ever since. (February was a down month for a lot of TV stocks: That's when Granite agreed to pay NBC $362 million for a 10-year affiliation deal for kntv San Jose.) Belo's stock had been stalled between $16 and $17 for most of the spring and summer but recently popped to more than $19, after its board approved a 25 million share buyback authorization that could cost $430 million.

Sinclair Broadcast Group's stock price is about 50% below its 52-week high of $21.87, largely because its operating results continue to underwhelm Wall Street.

Cable's been sliding since late January, when investors got anxious about the pace of operators' cash flow growth. Those fears were realized two weeks ago when usually-steady Cox Communications missed its cash flow targets and the simply-massive AT & T Broadband posted a sharp decline. Cable stocks dropped 10% to15% on that news, recovering only slightly last week.

Radio stocks remain in relatively good shape, as sales stay robust and its share of the overall advertising pie continues to grow. Paul Sweeney, broadcasting analyst with Credit Suisse First Boston says radio's share of the overall U.S. advertising pie grew from 7.5% to 8.2% in 1999.

Analysts say that the TV station sector as a whole probably isn't going to show major revenue and profit growth over the next 12 to 18 months.

"TV results so far this year are generally in line with expectations, but the growth has not been spectacular," Sweeney notes. "That's really what is driving the stocks. The perception is the TV stocks have not [been] and are unlikely to be particularly strong growth stories going forward. Radio is where the growth is."

A recent forecast by Veronis Suhler & Associates, the New York media investment banker, supports that view. VS & A projects significantly slower growth for the TV industry between now and 2003, when annual growth will average about 5.3%, almost two percentage points slower than the 7% yearly growth achieved from 1993 to 1997.

The national spot market remains a key culprit in local TV's slow-growth story. "National spot just isn't growing," says Sweeney. "And if you're not No. 1 or No. 2 in your market, those dollars are even harder to come by." Greater competition from cable is hurting spot, and some advertisers are shifting more dollars into the hot network marketplace away from national spot, says Sweeney.

Political advertising and the Olympics will give the national spot segment a bump in the second half of the year, analysts say. But 2001 should be another down year. Lee Westerfield, broadcasting analyst at PaineWebber, predicts a flat year at best for local TV advertising next year, with a 2% drop for national spot and a 2% gain for local spot sales.

The problem with national spot, says Westerfield, is there are simply too many alternatives, including cable and radio. The solution, he says, is size. And broadcasters that don't bulk up and cover 10% or more of the U.S. are at risk. Over the next three years, he sees many smaller broadcasters bailing out.

"It's really become a bifurcated market," he says, where major players like Tribune and Hearst have mustered size and leverage to address changing business conditions. Meanwhile, he adds, smaller broadcasters lack the clout they need to compete successfully.

State Street's Haverty says investors also worry about the continuing steady fractionalization of television. Emerging technologies-like streaming media over the Internet and handheld wireless devices-present additional competitive threats. And while the switch to digital broadcasting presents the potential for new business opportunities, the TV sector hasn't demonstrated to Wall Street that it knows how to exploit those opportunities successfully.

Long-term, TV is simply "an unattractive business," Haverty says. "As an investor you tread in television at your own risk."