15 Oct Gray Television (GTN)
Are the days of broadcast TV dead? Have streaming services hammered the last nail into the coffin of the golden age of television and resigned it to the dustbin of history? There’s plenty of evidence to suggest that it has. Or if not entirely dead, it’s on its way out the door. But is there a future at all for broadcast media, and if there is can we find value in any of these beaten down stocks?
The death of broadcast television is certainly an easy story to tell. We can see it happening in our own homes. Gone are the days when families would sit around the television set watching one of the 3 or 4 viewing options (sometimes less in rural areas) they were provided by TV stations. These days you’ll have someone watching Netflix on one TV, another on Amazon Prime on a tablet, and the kids playing computer games on Apple Arcade or watching Youtube videos on a PC. Options are now off the charts and there are only a certain amount of eyeballs to grab the attention of.
The pandemic only seems to have sped up the process. With many under lockdown conditions, there was only so much free to air television you could watch. A host of productions had to shut down filming causing most TV shows to end their seasons prematurely. Which unfortunately left a void just when consumers needed it most. It was a double whammy for the broadcasting stations.
Many viewers, especially older ones, found themselves needing more home entertainment options so signed up to streaming services for the first time. In the US streaming subscriptions jumped by an incredible 32% last year to a total of 308.6 million. Netflix now has 200 million subscribers globally, while Disney Plus has crept up to 100 million in only the second year of its existence. Add to these Hulu, Prime, HBO, Paramount plus, and a host of others and it’s a revolutional juggernaut.
The success of streaming has changed the nature of television itself. TV hits from yesteryear just don’t happen in the numbers they used to. The most successful show of 2021 so far has been Mare of Eastown which pulled in 4 million viewers for its final episode back in May. Seinfeld would average 26.6 million per episode for its long run, with 76 million piling in to watch its finale. Friends reached an average of 23.6 million per episode. Back in 1983, the MASH farewell pulled in the most viewers ever with 105.9 million watchers. Game of Thrones has perhaps been the only outlier of the current crop, having 20 million viewers tune into its finale even though it was on paid subscription service HBO. Otherwise, the TV hit is dead.
And there’s a good reason for it. The people that make TV aren’t making TV for the masses anymore. Because of the nature of streaming services, there are now a greater number of shows being made with fewer people watching each one. It makes more sense for streaming companies to have a diverse array of shows that appeal to each individual in a family, rather than the one show that appeals to all of them. If there are numerous different shows that each member of the family likes you’re much more likely to keep your subscription. It’s the new world of niche television.
So are TV broadcasting companies as dead as their share prices tell us? Well, let’s not count our chickens just yet. There’s still the matter of live sports, news and politics, and of course reality TV. They have been the saving grace for broadcasters as drama and comedy shows move into other formats. Our stock report subject for today, Gray Television, has been continually drawing in revenue from these areas, while it continues to build its TV station portfolio across the US.
Gray is based in Atlanta, Georgia, where it was founded in 1946 by James Gray. It now owns or operates 161 stations in the US in more than 100 markets. They took over Raycom Media back in 2019 for $3.7 billion, Third Rail Studios last month for 27.5 million, Quincy Media earlier in the year for $925 million, and pending approvals will own 17 more stations from Meredith by the end of the year in a deal worth $2.8 billion. When this deal comes to fruition Grays will be able to reach more than a third of US households and make it the second-largest local TV provider on the continent. And there’s money to be made with that size of audience.
The more access the Broadcaster has to consumers the more advertising dollars it can pull in. There are four major networks in the US. Those being ABC, NBC, CBS, and Fox. When you own the right to at least two of these stations in any market you have the ability to attract more revenue. By the end of the year, Gray will have access to 40 markets where it shows multiple Big Four networks. It will also be the top rating tv station in 79 of the 113 markets it operates in.
One of the biggest revenue raisers in terms of advertising is in politics. Due to the nature of local politics, the major parties want their advertising to hit local markets. And that’s just what local TV stations provide. Political spending hit new records in the 2019/2020 cycle, reaching $8.5 billion in total. It was 30% higher than original predictions and 108% higher than the spending from 2017/2018 which was the previous record. More than 60% of this was spent advertising on local television stations, from more than 9.3 million advertisements in over 4300 federal, state and local elections. Grays dominates this space with many of its stations in the hard fought battleground states. Of course, this type of revenue is cyclical, peaking in an election year with a smaller bump during a midterm year.
The pandemic has been tough for attracting advertising dollars. 2020 was a bad year for television broadcasters trying to attract new business. Despite this, in their latest earnings announcement, management saw advertising revenue almost reach 2019 levels with only a fall in auto advertising stopping them from going higher. They stated “With strength in nearly all advertising categories, we finished the second quarter ’21 within one point or so off the second quarter of 2019 in terms of total core revenue. The outlier, relative to ’19, remains the auto category, which was down and continues to face chip shortages and supply constraints that are depressing auto advertising. In fact, if the auto category in the second quarter of ’21 was simply flat with ’19, our total core revenue would have been 6.5% higher in the quarter versus the second quarter of 2019.” This will all change, however, as the economy reopens over the next few years.
While advertising has been hard to get, Gray continues to rake in money from traditional means. It distributes its stations and shows to cable television networks, satellite stations, and of course streaming platforms. It pulled in $371 million from this revenue stream in 2020 and hopes to surpass $400 million in the current year. This type of revenue isn’t dying anytime soon. TV broadcasters such as Grays will continue to bring in cash while they look to access new markets and innovate into new ventures.
There seems to be life in the old dog yet. However, the share price doesn’t reflect this in the slightest. Compare Netflix, which has a price to earnings ratio of 65.25 despite it coming under pressure from countless new competitors. Grays p/e is a measly 6 times earnings. Sure, they have accrued a fair amount of debt with their latest acquisitions, but they are shrewd additions that will bring in many advantages long term. They also have cash flow coming out of everywhere and assets that are easily liquidated if they get into any monetary problems. They are priced to fail, and anything else will see the share price rise from these levels. I think their size and strategy will make them a winner in the TV broadcasting stakes and make a great purchase to hold in your portfolios.