Media Talk

Sinclair Reports Mixed 1Q17, Reiterates Long Term Guidance

Sinclair Broadcasting (SBGI) reported 1Q17 earnings in line with analyst estimates.  Guidance for the second quarter appears a little light although management reiterated all guidance for 2017 and 2018 suggesting it is mostly timing issues.  The stock is responding poorly to the earnings report and was falling heading into the report.  The timing of Northlake’s recent purchase of SBGI was certainly off base.  We remain highly confident in the intermediate term upside target of near $50 driven by future highly accretive acquisitions of TV stations.  Announcement of deals is probably now necessary for the shares to rebound.

Investors have turned negative on media stocks over the past two weeks on accelerating cord cutting and weak advertising trends.  All the large cable and satellite companies have reported and subscriber losses for video clearly picked up in 1Q17.  The first quarter is seasonally strong and housing data has been firm, so it is hard to conclude anything beyond more cord cutting.  At the same time, advertising trends have softened, something evident even at SBGI, which showed the best ad trends of companies that have reported thus far.  Management reassurances on ad trends fell on deaf ears as there is plenty of noise and adjustments in SBGI’s reported numbers and guidance for a suddenly skeptical investor community.

We see the current selling of media stocks and SBGI as overdone, although with many larger companies still to report, there could be further controversy.  For the past six to nine months, media stocks have done very well as investors flocked to the group and exited retail and other troubled consumer industries.  Media stocks are probably over owned at the moment by investors who are not experts in the industry.  This is exacerbating current selling.  With big profits and big positions, the sentiment shift is particularly harsh on the stocks.  Valuations have already reset substantially, particularly given modest reductions in 2017 and 2018 estimates.  We expect support nearby for SBGI and the rest of the group.  We also reiterate that SBGI has positioned its balance sheet to take advantage of loosened TV station ownership rules and these deals will be highly accretive to earnings, cash flow, and shareholder value.  We reiterate our positive view of SBGI and refer you to our very recent blog post outlining our investment thesis.

SBGI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  SBGI  is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

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