Description

Belo is a pure play on television broadcast stations in the US.  The stock trades at less than 6x 2011 earnings. They have stations in a swath of states known as the "smile states" with the flagship station based in Dallas.  It is an example of a company in an industry that faced severe cyclical headwinds where the management team made all the right moves.

Belo's management was quick to react to the financial crisis by cutting costs and eliminating its dividend, saving shareholders the dilution that would have come from an equity raise.  That measure is one of the reasons the stock has risen from 60 cents to $6 today.  Despite the run, the stock is only trading at 5.3x EBITDA and has a very attractive free cash flow yield of 21% (assuming maintenance capital spending of between $15m).  The stock has been hammered in the recent market selloff and Russell rebalance despite very strong operating performance and advertising economic tailwinds.

Most important, their business is sound.  TV broadcasters are the one form of traditional media that may come out of this period with their business model more or less intact.  Despite the importance of cable and the internet, local broadcasters still have considerable power which derives from the content they create in local news, which is still a huge money maker.  Evidence of this power was seen when NBC was forced to fire Conan O'Brian from the Tonight Show because the decline in ratings was causing local affiliates to lose money on their evening news shows, money they share with NBC.

Another positive development for local TV is retransmission revenue from the cable companies. Cable companies pay high per subscriber fees for cable network programming and until recently paid nothing for the broadcast networks they have carried.  We recently attended a panel of leading independent broadcasters. They were all of the view that they will get more money from retransmission rights and that it would come from taking money from the minor cable networks on channel 256 or from higher cable bills or both.  They were indifferent to where the money would come from other than that they would get it.  This incremental revenue all turns to cash.

Belo also benefits from political ads and the resurgent automobile advertising that all but disappeared last year as the industry witnessed an almost 50% drop in sales.  It is coming back strong now.   In addition, discussions with marketers indicate that TV inventory is incredibly tight and that pricing power has returned to the broadcasters

Catalyst

Given the increased retransmission fees, cost cuts and political spend in Texas, we think that Belo could easily come back to $300 in EBITDA and possibly better.  A return of the dividend would give the stock a 5% yield.  Since the company is still family controlled and is constantly rumored to be a consolidation candidate, a deal cannot be ruled out. That said, I think the stock will do well without a deal.