TV Stations Rebound, But How High?

When the economy starting hammering the broadcasting business last year, Gray Television President-COO Robert Prather kept the faith, telling security analysts that he was putting most of his personal wealth into his company's depressed stock, then trading at around $4.

After months and months of stomach-churning uncertainty that saw those shares trade as low as 19 cents a year ago, Prather should be feeling a little better about his retirement strategy.

Since the end of the first quarter, Gray shares, along with those of other pure-play station groups, have rebounded nicely. Gray closed yesterday at $2.15.

While covenant violations, loan defaults and bankruptcies still loom over the beat-up sector, the upward swing in stock and debt prices is a sign that investors think revenues -- and the broadcasting business -- have bottomed out.

"My impression was that Wall Street six months ago thought that we were all going into bankruptcy or restructuring or something," Prather says, noting that improving bond prices apparently led the way. "Somewhere along the way they realized that wasn't going to happen and that there was some value in these groups in stock and bond prices."

Prices are still but a fraction of historic highs. But for the few publicly traded pure-plays -- including Gray, Belo, Nexstar and LIN -- it's psychologically and financially reassuring to climb out of the dangerous depths of the penny-stock pit.

Says Nexstar Broadcasting CEO Perry Sook: "I think it's a realization by investors that the end of the world didn't happen, that the stock and debt sell-off was ridiculously overdone and as the stock market in particular tends to look forward to recovery in 2010, plus political revenues, these stocks are incredibly cheap by historical standards."

A snapshot: Since the end of the first quarter, Belo shares are up over 500 percent; Gray, nearly 500 percent; Nexstar, more than 300 percent; and LIN, nearly 300 percent.

"What I'm hearing is an awful lot of ‘It's not perfect, but it's getting better and getting better faster than we thought it would,' " says station broker and investment adviser Larry Patrick of Patrick Communications.

But what optimism there is, is guarded.

"We have six different models running right now for 2010," says Sook. "The worst case: No growth in core revenues. The best case: mid single-digit growth. The art in forecasting is not only how much but when."

The other good news is that the improving economy and thawing debt markets may lead to more refinancings. That's key to relieving oppressive debt burdens and gaining breathing room on debt-related covenants.

"I think you'll see more heavily leveraged broadcasters potentially coming to tap debt markets over the next 60 to 90 days," says Barry Lucas of Gabelli & Co. "That's available partly because there's anticipation the economy is going to get a little bit better over time."

A recent sign: Sinclair Broadcast Group is buying back two different series of notes for better prices than proposed just two months ago. It also plans a private placement of 12 percent notes and will begin paying back a loan that Cunningham Broadcasting, for whom Sinclair operates six stations under an LMA, defaulted on.

Sinclair said in mid-July it faced a cross-default on the Cunningham loan that could push it into bankruptcy.

Activity in the high-yield, or junk, category is one catalyst for improving equity and debt prices, says Richard Schmaeling, senior vice president-CFO at LIN Television.

"The high yield market has recovered dramatically," he says. "A lot of people saw high-yield bonds running and piled on."

Add that to companies renegotiating covenants (for a price, of course), improved cost structures and technical buying linked to anticipation of an improving ad market and the rebound in equity and debt prices is easily explained, Schmaeling says.

But he seasons that stew with a healthy dose of salt.

"We think that the reality is that consumer spending is going to take quite a long time to recover to pre-recession levels," he says. "It's not going to come roaring back. Consumer credit continues to contract and likely will contract into 2010. Unemployment is likely to stay high. We're not going to see a ‘V' recovery in advertising."

Kevin Shea, a managing director at Loughlin Meghji & Co., which provides various advisory services to financially distressed firms in or out of bankruptcy, sees little reason for optimism -- yet.

"I have talked to some CEOs, and frankly they don't know why their stock is up," he says. "When I look at pacings, information on clients' traffic systems, I don't see any activity that translates into rising stock or bond prices.

"The best thing I can say about the business, and this is not the beginning of any meaningful trend, is we're seeing the slope of decline is less severe.... I think broadcasters are looking for reasons to be optimistic. I don't think comparing to low standards is reason for optimism."