2023-10-17 18:28:32 ET
Summary
- Sinclair Broadcast Group is a diversified media company focusing on broadcast television and a wide range of content offerings.
- SBGI's main assets include robust local news, original programming initiatives, and ventures into the sports broadcasting domain.
- The company faces challenges from digital platforms and traditional competitors, as well as its heavy reliance on network-supplied content and certain advertising sectors.
- My valuation model suggests SBGI is undervalued; however, this hinges on the assumption of stabilizing revenues, which seems optimistic amid ongoing technological disruptions and market challenges.
- Thus, I rate SPGI a cautious "hold" due to its concerning debt burden and market dynamics, despite the potential upside from a purely valuation perspective.
Sinclair, Inc. ( SBGI ) is a diversified media company with a significant footprint in the broadcast television sector. SBGI mainly generates revenue through its offerings across a spectrum of content, including news, entertainment, and sports, which cater to a broad advertiser base. In particular, the company's main assets are Sinclair's robust local news, original programming initiatives, and substantial ventures into the sports broadcasting domain. However, the challenges of digital platforms and traditional competitors vying for audience engagement and advertising share are considerable headwinds for SBGI's business. Moreover, SBGI's heavy reliance on network-supplied content and certain advertising sectors is a risk further accentuated by its elevated debt ratio. From a purely financial perspective, SBGI looks undervalued, assuming its revenues don't continue to decline. However, given the ongoing technological disruptions in media, I doubt this is a realistic assumption. Therefore, I would rather give SGBI a cautious “hold” rating, acknowledging the upside yet stressing the financial uncertainties that could significantly outweigh the perceived undervaluation allure.
Business Overview
SBGI, also known as Sinclair, Inc., is a diversified media company focusing strongly on broadcast television. The core of its revenue comes from providing various content, such as news, entertainment, and sports, across different platforms. Thus, SBGI is evidently a solid channel for advertisers and businesses to reach a wide audience. However, the key facet of Sinclair's operation is its pronounced focus on local news and original programming, exemplified by its ventures such as NewsON and The National Desk (TND).
Since its inception, the Smith family has played a pivotal role in the trajectory of SBGI, initiated by the efforts of Julian Sinclair Smith , who established the company. Later, his son, David Smith, assumed consequential leadership positions, ascending to the role of CEO in 1988 and thereafter Chairman in 1990. The family's involvement didn’t end there; other sons were also integrated into the business framework—Robert assumed the treasurer position, Frederick took on the director role, and Duncan served as secretary and director. This familial involvement is noteworthy when examining SBGI, given that collectively, the Smith family holds a significant 80.8% share of SBGI stock. Therefore, as a whole, SBGI is essentially a family-owned corporation.
Adapting to New Market Dynamics
More recently, SBGI transitioned from two accounting segments, broadcast and local sports, to solely focusing on broadcast. This single segment encapsulates television stations managed by Sinclair Television Group and its subsidiaries. Previously, the local sports segment under DSG housed regional sports networks. SBGI's footprint in sports broadcasting was notable, with ownership of 23 Regional Sports Network (RSN) brands and services to 191 TV stations across 89 markets. The Bally Sports RSNs, catering to most MLB, NHL, and NBA teams in the US, were a key revenue source bolstered by the enduring appeal of professional sports. Sinclair also diversified its sports broadcasting portfolio through ventures like the Tennis Channel and Marquee Sports Network. And it all culminated in 2023 when SBGI announced a new reorganization, which might continue its strategic pivots post-deconsolidation of DSG.
In my opinion, this strategic refocusing on broadcasting by SBGI is prudent, given the dependable revenue streams historically generated from its broadcasting sector. While lucrative, the detailed venture into local sports, particularly through the Bally Sports RSNs, may have dispersed the company's resources and attention. I believe that by channeling efforts and resources towards bolstering its broadcasting domain, SBGI is likely positioning itself to harness the inherent potential within this sector. Also, SPGI’s inclination towards broadcasting, underscored by integrating new networks like the Tennis Channel and Marquee Sports Network, seems to be a well-thought-out initiative to consolidate its market position and adapt to the evolving industry dynamics.
Source: Business Wire.
Nowadays, SBGI contends with both traditional adversaries and emerging digital challengers, such as OTT platforms and big tech. One of the core challenges for SBGI is its reliance on network-supplied content to cater to a varied viewer demographic. Moreover, the advent of digital media, with its ability to offer targeted advertising, sharpens the competitive edge against SBGI, thereby presenting a formidable threat to traditional broadcasters. This is exacerbated by SBGI's pronounced reliance on automotive and political advertising, which I think suggests a high degree of financial vulnerability to economic downturns when seen in conjunction with its elevated debt ratio . Thus, I believe SBGI's high debt can curtail its ability to invest in technology and content. And these are crucial for maintaining competitiveness.
Source: SPGI’s latest earnings slides.
Diamond Sports Group Implications
Interestingly, SBGI established DSG to manage SBGI’s regional sports networks and stadium naming rights as part of SBGI's deeper venture into sports broadcasting. However, financial troubles at Sinclair's Bally Sports, managed by DSG, initiated by a missed $140 million interest payment, have led to a Chapter 11 debt restructuring. Moreover, this threatens traditional broadcast models and pushes Diamond Sports toward bankruptcy. This dynamic jeopardizes SBGI's position in the $55 billion sports-media rights business. It risks the revenue of several MLB, NBA, and NHL franchises due to DSG's hefty outstanding obligations this year.
Moreover, cord-cutting has significantly affected SBGI, reflecting a wider trend impacting pay-TV providers. The movement towards streaming and the reduction of subscriptions by consumers are leading to a rapid decrease in traditional TV viewership. SBGI, like other broadcasters, is heavily impacted by these industry challenges, underlining a tough operational scenario in the face of changing media consumption habits.
Also, the MLB has recently issued a stern ultimatum to Diamond Sports amid growing concerns regarding their debt. Diamond Sports holds the broadcasting rights to 12 MLB teams, which positions them as a significant stakeholder in the baseball broadcasting domain. So, the escalating financial struggles have prompted MLB to take a decisive step by petitioning the court to liquidate Diamond Sports. Through this action, MLB aims to safeguard broadcasting rights and ensure the continuation of a stable and reliable broadcasting service for the numerous baseball fans and the teams involved.
SPGI’s latest earnings slides.
Unfortunately for SPGI, DSG’s potential bankruptcy poses a significant threat to its sports-media rights venture, prompting a re-evaluation of the longstanding local sports revenue model. This situation highlights another underlying vulnerability in SBGI's business model, potentially affecting its financial health, market confidence, and competitive positioning in the long term. Above , you can see that the company will face a waterfall of debt maturities that will test its financial resilience. So, when analyzing SPGI since its inception, it’s at a transitional phase due to the restructuring efforts of DSG, its highly indebted capital structure , and trying to find its business niche in the constantly disrupted modern media sector.
Valuation Perspective
From a valuation perspective, SBGI’s long-term revenue growth has enjoyed a relatively stable financial footing with a consistent revenue increase since 2013, exhibiting a CAGR of 12.9% . However, a noticeable revenue decline has emerged since 2021, dropping from $6.08 billion to $3.32 billion over the TTM. This showcases the business’ fundamental deterioration due to an erosion of its competitive profile. This downturn challenges the company's valuation; if this trend of declining revenues persists, it swiftly leads to an overvaluation scenario. Notwithstanding this, for valuation purposes, one might consider the current financial status quo of the company as a constant with marginal growth. This assumption, albeit for valuation ease, doesn't negate the observed rapid deterioration in the business financials.
Seeking Alpha.
With that in mind, let’s consider that SBGI reports approximately $3.34 billion in yearly revenues as of the latest annualized figures. Thus, a preliminary estimate of the company's intrinsic value can be deduced by assuming a modest growth rate henceforth and considering the prevailing EBIT margins, tax rates, D&A expenses, capital expenditures, and investments in net operating working capital (NOWC).
Author's elaboration.
As you can see, my simplified valuation model suggests that SBGI is undervalued at present. However, this valuation hinges significantly on the supposition that the downward trajectory in the company's financial performance will halt, and marginal growth will ensue over time. This assumption, in my view, seems quite optimistic, especially considering the ongoing technological disruptions in the media sector. The company’s high debt load and concentrated ownership structure further exacerbate the risks, casting a shadow over the prospects for retail shareholders. I infer that the combination of these unfavorable factors will likely continue presenting headwinds for the company.
Overall, amidst the prevailing challenges, there exists a potential upside. Considering the scenario where the subject company succeeds in halting the revenue decline while maintaining its current margins, it could manifest as a subtle "Buy" opportunity primarily due to its appealing valuation. This perspective is closely linked to the anticipated stabilization of the company's revenue channels, which might enable it to sustain or enhance its share in the media market. However, broader market dynamics and inherent risks specific to the company propel me toward a more prudent rating. My reservation emanates from the potential financial quagmire SBGI might find itself in should the revenue continue to tumble. A persisting decline could potentially trigger a debt spiral in my view, escalating bankruptcy risks. Consequently, I opt for a cautious stance, rating SBGI as a “hold” despite recognizing the upside potential for investors with a higher risk tolerance. I believe this careful approach is warranted, given the unpredictable market conditions and the financial instability that could arise from continued revenue loss, which could significantly outweigh the seemingly attractive valuation of the company. I believe the prospective reward may not sufficiently justify the risk for a more conservative investor, hence substantiating the "hold" rating.
Conclusion
SBGI is in a complex scenario where its strong foothold in broadcast television and diversified content offerings stand against a backdrop of formidable challenges posed by digital evolution and competitive pressures. The financial scrutiny reveals a concerning trend of declining revenues, which, if persisted, could swiftly transition the perceived undervaluation to an overvaluation scenario. While the intrinsic valuation hints at an undervaluation, the assumption of revenue stabilization seems optimistic amidst the technological disruptions engulfing the media sector. The cautious "hold" rating encapsulates this dichotomy - recognizing the potential upside emanating from its core business strengths and undervaluation yet emphasizing the financial risks underscored by its elevated debt position and the relentless market challenges. Thus, I think it’s better to take a wait-and-see approach to ascertain whether SBGI can maneuver through the turbulent media landscape, stabilize its revenue streams, and potentially justify a more favorable rating in the foreseeable future.
For further details see:
Unpacking Sinclair's Valuation Amid Digital Media Disruption