GTN - Gray Television

[Packer16]

This is similar to TVL with a great LT debt deal completed paying only 6.3% interest until 2019.  This is a great rate for a B rated firm.  By 2019, GTN should be able to reduce debt by a further 61%.  They have done a great job reducing debt  and restructuring the preferreds from before crisis and can generate 2-yr avg $67m in FCF and $137 m in EBITDA.  GTN has exposure to swing states so political revenue is important.  The overall value is 6.5x EBITDA with takeover comps being purchased at 9 - 10x EBITDA.  The incredible trend that I have noticed is organic EBITDA (no acquisitions) is up 39% since 2006, the debt is down significantly, the preferreds have been redeemed and the stock price is down about 80% and has not recovered like BLC and SBGI.  The FCF yield is over 50%.  I have noticed similar trends in TVL (EBITDA up 54%, stock price down 50%) and NXST (EBITDA up 98% and stock price flat).

 

Packer

[Packer16]

A decent quarter and based upon management's estimate the 2-yr average FCF will be about $73 million (a metric used in TV land to smooth-out election years).  I actually sold a portion at $4.22 but not sure that was too smart given it has a FCF multiple of 3.3x.  The same can be said for TVL where I sold some at $12.23 but the FCF is only 5.0x.  Another related stock is NXST with a FCF multiple of 4.0x.  Given the most EV multiples of 7.2x to 8.0x, these are still cheap. 

 

The more I think about these TV stocks, the more I like them.  They appear to be cheap have good FCF growth from re-trans fees and an advertising rebound.  They also appear to be the cheapest (in terms of valuation) video distribution outlet.  I am surprised cable cos, telcos, Google or another content/aggregator has not be buying these distribution outlets.  General Communication in Alaska is the first I have seen do this just recently and General Communication is also cheap as triple-play player at only 5.0x EBITDA.  What am I missing?

 

Packer   

[ItsAValueTrap]

Personally I stopped watching cable TV even though I have it in my household... so I have a bias against cable TV.

 

Here's how I see the future of the entertainment industry:

 

A- There is an explosion of free content online.  But people will still pay for the really good stuff, in the same way that people pay for really good software over open source (even despite piracy and open source software such as the excellent Open Office being free).

 

B- I have no idea what will happen to cable television and over-the-air (which is related to cable but not the same).

 

C- The big picture is that you can move content over the air, over a cable (cable TV/Internet) either as TV or Internet packets, over a phone line, over satellite, over fibre optic, etc.

 

For any type of content where the user is pulling content, I think that the Internet / IP-based stuff will win.  I don't think that there is any question about this since there is a vast universe of content available on the Internet (and services such as Netflix).  PVRs are only a hack to avoid the inconveniences of TV programming schedules.

 

For any type of live events or news (e.g. sports, etc.), traditional TV might have its place.

 

D- In terms of advertising, online advertising is far better targeted and should be far more profitable than traditional TV advertising.  Look at what is happening with ad targeting... ads you watch on Youtube are way more relevant (and therefore profitable) than TV advertising.

 

So Internet-based TV may have huge advantages over traditional TV in the long run.  Better monetization (and lower delivery costs due to moore's law-like effects) will bring better content to online/Internet-based delivery... this could be very bad for traditional TV.

 

----

Another way of looking at it is this: do what John Malone is doing.  He is the expert when it comes to cable.  He's probably looked at over-the-air broadcasting and didn't find it attractive.

 

Berkshire owns Liberty Capital, DTV, and I don't know if it owns Sirius XM (though it's probably better to own Sirius XM through Liberty Capital).

 

Satellite radio will likely be the least affected by the Internet and the continuing explosion of bandwidth.  You can hook up a mp3 player to a car already... that doesn't seem to have killed radio.  Eventually it will be cheaper and more practical to stream Internet radio over your cell phone while you are in the car.  Good Internet radio may have difficulty developing without money from the "dongle" (the satellite radio).  I don't know if Sirius is safe from the Internet, but it is probably safer compared to over-the-air (and cable TV, but cable TV companies can still sell Internet and probably won't get killed by fibre).

[BargainValueHunter]

Aren't the real profits in licensing the content that you own? With the explosion in distribution channels the moat seems to be in what properties you own and where you allow your property to be broadcast.

[Packer16]

Your view appears to reflect the current consensus views based upon the valuations of the various distribution channels (OTA, cable, satellite and internet).  The EV of the OTA segment (@3x to 8x FCF) is only $10b while one cable co (Comcast) has an EV of $140b and the EV of the cable cos (@8 to 16x FCF) is $226b, the EV of satellite firms (@15x FCF) is $50b.  I view these as different distribution channels for content and thus there values should not be that disparate.  The cost per reach is clearly cheaper in the OTA segment.  Any of the larger search, tech or cable firms (Microsoft or Google) could buy the whole OTA industry and have it be accretive to FCF out of the gate.  A similar but not such a large difference can be seen in the radio space.

 

I disagree about targeted advertising.  If it was that effective then you would see a larger shift to internet targeted advertising.  The main issue with internet advertising is there is infinite supply versus a limited supply for OTA and cable.  Thus even though there is a shift to online, the profitability is illusive versus traditional OTA and cable advertising.  The Radio/TV and cable cos are much more profitable than internet advertisers and as important and also a moat which keeps profitability high.  When an ad buyer is looking to promote a product, he puts some in mass media (TV and radio) especially local ads for auto dealers etc and some in internet not either but both. 

 

Looking at what Malone has done is good signal.  Recently he has paid 8.5x for the UK cable co, so he sees value and upside from this relatively rich multiple.  In addition one of Malone students runs General Communications, a triple-play firm in Alaska.  He just recently purchased OTA TV stations to build a string local news organization.  This may be trend who knows.     

[ItsAValueTrap]

Thus even though there is a shift to online, the profitability is illusive versus traditional OTA and cable advertising.  The Radio/TV and cable cos are much more profitable than internet advertisers and as important and also a moat which keeps profitability high.  When an ad buyer is looking to promote a product, he puts some in mass media (TV and radio) especially local ads for auto dealers etc and some in internet not either but both. 

 

Here's how most Internet advertising works: you can track how many clicks convert into a sale.  So basically it becomes an optimization problem between advertising spend and profit... you spend just the right amount on advertising to maximize your profit.  Google even has an algorithm that does this for you.  This is how a lot of people on Google advertise.  You don't budget X% of your expenses towards your expenses... that is stupid.  You just maximize your profits... if that involves spending a lot of money on Internet advertising then that means you will make a lot of money.

This resembles direct-response television (infomercials)... if an infomercial is making money, the company will run it over and over again.  (They know in a short amount of time how many people call in and make a purchase.)  You can tell the most profitable infomercials are the ones that run repeatedly.

Because of the instant feedback, these advertisers tend to be very good at what they do... they quickly figure out what works and what doesn't.

 

Not everybody on the Internet advertises this way.  Some people do branding campaigns and the effectiveness of such campaigns is hard to track.  This resembles most of traditional TV advertising.

 

I disagree about targeted advertising.  If it was that effective then you would see a larger shift to internet targeted advertising.  The main issue with internet advertising is there is infinite supply versus a limited supply for OTA and cable.

There is not an infinite amount of Internet advertising.  People spend so much time in front of a computer and so much time in front of a TV.

 

-------

In general, I am biased.

A- I stopped watching cable TV even though my household has it.

B- I got burned on Idearc (IDARQ)... it was a phonebook company.  Phonebook companies have moats against other companies trying to start phone directories.  Unfortunately, it is a declining business and these companies are entering bankruptcy due to their extreme levels of leverage.  I want to avoid declining businesses.  Warren Buffett says that Berkshire Hathaway was his biggest mistake.

[Packer16]

I think in terms of advertising it depends upon what your objective is.  If internet was that much better for all types of advertising no one would advertise on TV/radio but they still are.  It is not because they are stupid it is because it works for their target demo.  I agree the internet will grow faster than TV/radio because of the characteristics you point out.

 

Profitability of internet advertising firms is another story.  (May be you meant value to the ad buyer - if so ignore the below).  The one question I have is if internet advertising is very profitable, where are all the profitable firms doing internet advertising?  The only one I know of is Google.  Just about every TV/radio broadcast firm out there has great margins not so for the rest of the internet advertising firms.  I have valued internet advertising firms as a part of my job and I have seen mostly low/no profit firms in this space versus TV/radio where just about everybody has margins over 25%.    Part of the reason for low profitability and the constantly declining ad revenue per page is the large inventory. 

 

As to avoiding declining industries, I agree.  I think the market thinks radio and TV are declining industries.  I do not and that is where the opportunity is.  Radio is a sideways industry (with some growth niches) and TV has grown organically over results before the crash.  See the first post in this string.  I think Buffet may agree based upon his purchase of newspapers.  With these firms you are getting newspaper pricing with growth characteristics. 

 

I agree about directory firms but you can see the decline in the EBITDA and FCF trends and these firms are cheap for a reason.  There are other internet firms like Earthlink and United Online that are cheap for the same reason and you can see it in their historical EBITDA and FCF trends.  Looking at the 5 to 7 year historical trends in EBITDA and  FCF is once of the tools I use to differentiate the terminal decliners from the potentially misunderstood stocks.

 

Packer

[no_free_lunch]

Packer,

 

Have you ever looked at glacier media (GVC)?  A canadian traditional media company with low price to operating cash flow multiple.  This is not a recommendation but it might be worth looking into.  I own a small stake in it.

[ItsAValueTrap]

Profitability of internet advertising firms is another story.  (May be you meant value to the ad buyer - if so ignore the below).  The one question I have is if internet advertising is very profitable, where are all the profitable firms doing internet advertising?  The only one I know of is Google.

With certain forms of Internet advertising, the #1 player enjoys a huge profitability advantage.  Because Google drives the most volume in search (and a lot of volume for display ads), advertisers spend more time optimizing their Google campaigns.  This means increased competition for the same keywords, which means that Google will make more per ad than an "equivalent" ad of their competitors' (if there is such thing as an equivalent ad and assuming that demographics are identical... which they aren't).

 

Apparently these other Internet advertising companies are very profitable:

Baidu and maybe Yandex

affiliate marketing networks

Facebook

 

But I don't think that the profitability of online advertising companies may matter.  Traditional media will still have to compete against online alternatives.

 

I think Buffet may agree based upon his purchase of newspapers.

It seems like he is being very specific about it, buying community papers that he thinks won't be killed by information/news online.

 

I think the market thinks radio and TV are declining industries.

I don't like traditional radio and OTA TV stocks because I'm not sure where the future is headed.

 

historical EBITDA and FCF trends

Personally I don't rely on past trends.  Sometimes the decline is very swift and sudden... First Solar would be an example.  Knowing very little about First Solar, I used to be long the stock thinking that they had a moat and were the lowest-cost producer due to their unique technology.  Then polysilicon prices crashed and they were the highest-cost producer.  (Fortunately I sold out when I saw that the CEO was dumping his shares.)

 

The regulatory aspect of television is not something I understand very well.

[Packer16]

In my mind profitability along with lack of declining revenue tells you how a company is fairing competitively.  For even if online revenue is growing but you can't make a profit at it then I am not going to invest as the customer is getting a large part of the value. 

 

AS to Buffets theme, I think it is more broadly local news and content.  The radios and TVs that focus on this niche (SALM and SGA for example in the radios) have faired better than the broad based content providers like Clear Channel and Cumulus.  TVL, GTN and some extent NXST focus on this in the TV space.

 

As to where the industry is going no one knows for sure.  I think the TVs and radios will co-op the internet much like the incumbent telcos did with wireless versus directories and the internet.  The directory example however is direct competitor to search an the internet is more of an enabler.  I think broad based profitability in an industry is a better sign of stability versus concentrated profitability. 

 

First Solar is a changing industry subsidized by the gov't.  A totally different animal than TV/radio. 

 

Yes I have looked at Glacier and it is on my radar but I find the TVs/radios a more compelling value here.

 

Packer

[LC]

 

But I don't think that the profitability of online advertising companies may matter.  Traditional media will still have to compete against online alternatives.

 

I think the market thinks radio and TV are declining industries.

I don't like traditional radio and OTA TV stocks because I'm not sure where the future is headed.

 

 

Couple of things: Digital advertising isn;t the be-all-and-end-all. Advertising doesn't work in a vacuum. It's not TV vs. Radio vs. Billboards vs. Digital. They all combine to drive sales or brand awareness. Advertisers know this. Attribution is the forefront of the advertising industry right now.

 

So when you say traditional radio and TV station stocks are "hated by the market" and "you don't know where their future is headed"....isn't that exactly the type of investment opportunity you want? One that the market is heavily discounting and that most people don't understand?

 

Just food for thought.

[ItsAValueTrap]

One that the market is heavily discounting and that most people don't understand?

 

I think that it's best to stick to things within your circle of competence, and avoid the things in the "too hard" pile.  Predicting the future of most technology companies goes into the too hard pile for me.  Even media is really, really hard.  John Malone has made plenty of mistakes in media.  When his net worth was tied up in AT&T stock, it was a nightmare for him.  He didn't realize that the CEO would destroy a lot of shareholder value through dumb acquisitions.  He was a little wrong on how the combination of assets would play out.

He was kind of wrong about the smart TV being the future (along with Bill Gates) and kind of wrong about @Home.  People used to think that Internet portals would be the way to monetize things.

 

Even Malone isn't certain how the Internet will affect the media industry.  The big problem is getting people to pay for content delivered over the Internet.

[ItsAValueTrap]

Attribution is the forefront of the advertising industry right now.

Part of me thinks that it may be BS.  Certainly the idea of "attribution" is favorable for the advertising industry as it would justify higher advertising spending.

 

Just because something is "hot" doesn't necessarily mean that it has value and is here to stay.  A lot of things happened in the Dot-Com Bubble that did not create value and faded away (e.g. online portals).

 

Advertising doesn't work in a vacuum.

There is no rule in capitalism that says that you have to spend money on advertising.  And you don't have to engage in (what I call) spray and pray advertising where you buy some TV, print, billboards, social media, etc.

 

 

Anyways... this is getting off topic.

[Packer16]

The reason I think TV and radio is interesting is I think historcially it has not been in the two hard pile (like hardwarte technology has been), WB has invested in many of these in the past, and if the co-opt model is what is happening (based upon revenue and margin trends I think this is what is happening) then this is even more interesting.  With valuations of 3 to 8x FCF the market is saying theses firms are in terminal decline like directories and even if they hold steady there is a nice margin of safety.

 

Packer

[ItsAValueTrap]

I guess the world is constantly changing.

 

People used to think that railroads were really safe.  Railroad companies leveraged themselves to the hilt and were able to sell 100-year bonds.  Then the airplane came along and practically every railroad went bankrupt.

 

I think the Warren Buffett approach to media would be to invest in the companies which will sustain growth over the long run.  Liberty Capital / SiriusXM / DTV is probably the way to go.  I haven't checked but those may be Berkshire's biggest positions in media.

 

2- Everybody's "too hard" pile is different.

[lessthaniv]

Great call Packer16.

:)