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Broadcasters’ Stocks Still Stuck

Station Groups’ third-quarter earnings have been rosy and rosier, with record political ads fueling revenue gains of 20-30% in the quarter for the typical local media groups. Yet the stock prices of prominent station groups, such as the pure-plays LIN, Gray, Nexstar and Sinclair, continue to lag.

After stations weathered the brutal recession and enjoyed a robust recovery this year, the weak reaction from Wall Street can be a sore point for broadcast chiefs. “I think our stock is ridiculously undervalued,” says Nexstar Chairman/President/CEO Perry Sook, who reported a 21% revenue increase on the same day last week that his company’s stock muddled below $6—off its 52-week high of $7.56.

Many local broadcasters not only reported flush third quarters, but forecasted similarly sunny fourth quarters too, thanks in large part to pent-up demand from advertisers that were kept off the air when the political ads zoomed in. Last week, Sinclair forecasted fourth-quarter revenue would pace the group to a record year for political advertising, while Scripps management forecasted pre-2009 core advertising levels for the final quarter.

Fisher Communications sees it similarly. “I do know there’s pent-up demand, and I do know there’s a great deal of pressure on inventory,” Fisher President/CEO Colleen Brown said on the company’s Nov. 2 earnings call. “I wouldn’t have said [Fisher is headed] for its highest margins in fi ve years without a good, strong remainder of the quarter coming.”

Yet local broadcast stock prices are not reflecting that vigor. Conventional wisdom says the Republican gains in Congress last week mean a more pro-business environment and resultant boost for publicly traded companies. But on the morning after Election Day, Nexstar’s stock was $5.99, LIN’s was $4.71, Belo’s was $5.97, Sinclair’s was $7.98 and Gray Television’s was a lowly $1.98.

On Wall Street, however, some see a coming surge for broadcast stocks. Michael Alcamo of investment banking firm M.C. Alcamo & Co. says the broad markets typically get a postelection boost, and broadcasters outperform the market, thanks in part to the sector’s high margins. “Look for advances in the broadcast stocks that haven’t surged this year,” Alcamo says. “Nexstar, Meredith, continued growth in Fisher, recovery at Belo, Gannett and Media General.”

Newspaper holdings, Alcamo adds, will continue to drag down prices.

As the fourth quarter progresses, all eyes turn to 2011 to see if local broadcast can sustain its revenue recovery. Analyst Michael Alexander of Moorgate Partners says no elections or Olympics and some shaky economic forecasts may conspire to keep local media stocks depressed. “[2011] could be a down year, or a significantly down year,” Alexander warns.

But with automotive advertising and retransmission consent revenue thriving and local TV dramatically outperforming rival media, local broadcasters see it differently. Some suggest it’s a mistake to compare 2011 to its dreadful oddyear predecessor, which Sook calls “a one-off.”

“The good news is, I’m having a lot of conversations with smart equity guys now,” says Vincent Sadusky, LIN president/ CEO. “A year ago, you weren’t seeing much interest in the space. I feel better about the business than I have in years.”

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