-Thus we think investor concerns about GTN's term debt have been addressed by this deal; we expect GTN will use the proceeds from its preferred offering to pay down debt.
-We predict GTN will benefit from roughly $60 million in political ad spending in 4Q;08 and we forecast GTN's EBITDA will be $118 million in 2008.
-GTN current stock price implies an EV/EBITDA value of just 7.6x which we think undervalues GTN shares.
-Sharp Trader recommends taking a position in GTN shares as we think GTN is undervalued at the $2.90 and will rally on any strength in the stock market.
-To derive our price target we apply a 11x multiple to our 2008 EBITDA estimate which implies an equity value of $7.60.
Sharp Trader thinks a 12% dividend on a limited number of shares is a bargain as compared to the alternatives
GTN's cost of capital will increase roughly $4.8 million or $0.10 per share; which is a bargin as compared to the step-up in interest GTN would have faced had its convenants been broken. On June 27, 2008 GTN issued $75 million face valued preferred at a 5% discount and GTN's net proceeds were $69 million after fees. According to the company's SEC filings it will use $65 million of the proceeds to pay down debt.
While the deal raises GTN's cost of capital by $4.8 million (to roughly 6.3% from 5.6%) we think it benefits shareholders in the long run. Due to the ad recession owing to weakness in the U.S. economy we expect EPS to be under pressure in the 2Q:08 and 3Q:08 and prior to paying down its debt GTN would have been close to violating its debt convenants. Due to the credit crisis we think GTN would not have been able to renegotiate its term loans at a reasonable interest rate even given the recent rate cuts by the U.S. Federal Reserve Bank.
We expect GTN to benefit from the US presidential election as Cable TV deals could provide upside to our estimates.
At a recent media conference GTN's management stated that its 2008 political advertising will exceed $60 million which is an significant improvement from the $43 million posted in the 2006 national election. Thus we expect GTN to return to profitability in 2008 and earn $0.27 per share as compared to a loss of $0.52 in 2007. We expect GTN will use any excess cash owing to the elections to pay down its debt and redeem its preferred shares although we have not updated our model yet owing to the timing of any potential debt repayments.
We think EBITDA is a important measure for TV operators as the ongoing conversion to HDTV has resulting in increased non-cash D&A expenses. We forecast EBITDA of $118 million in 2008 for GTN as compared to roughly $70 million in 2007.
Most of GTN's cable re-broadcast contracts expire in 2008 and 2009 and we expect the company will benefit from renegotiated rates. In 2006 a Federal court ruled Cable and Satellite TV operators have to compensate local TV broadcasters when local stations are aired on cable TV networks. Currently, GTN derives less than $2 million from re-broadcast and we think GTN will negotiate a rate $0.15 to$0.30 per subscriber. The low end of the rage assumes GTN has negotiated preferred placement of its digital second channels on the cable networks.
While we think GTN could derive $5 million to $10 million in incremental revenue from cable rebroadcast in 2009. We have not updated our model to reflect the increased revenue as a weak economy and lengthy negotiations with the cable companies could push out the benefit to the top line from re-broadcast into 2010.
We think local TV is adapting to the new media and local TV station operators like GTN are undervalued.
In the new age of media Sharp Trader thinks superior local content combined with superior branding will enable Local TV stations to remain viable despite the growth in Internet and cable TV advertising. We think national news outlets like FOX or Internet operators like Google will not compete with the local TV stations in providing local News and Sports programing.
We think the trend of lower ratings due to the expanded number of TV channels will continue but we expect local TV to remain relavant. Thus as viewership is fragmented local TV ratings will still garner 3 to 7 ratings points as compared to the estimated 1 point for the most popular cable TV news programs. Most TV viewers still tune into thier local TV news program even if they are watching cable programing. Owing to this strength of content and brand we expect Local TV operators will eventually win back national and local adverising market share from Cable TV and the Internet.
We also think Digital second channels could be a real boon for TV operators. Digital broadcasting is more efficient than the analog system it replaces and as a result the FCC has taken bandwidth away from TV operators but has given them the right to broadcast a digital second channel with bandwidth the local TV channel will retain. Sharp Trader expects the local TV broadcasters will find a profitable business model for these second channels in 2009 which may include broadcasting content on these channels our leasing the bandwidth to telecoms. Either way we think digital second channels could provide upside to our estimates.
Our intrinsic value estimate of $7.60 suggests significant upside in GTN shares.
Despite an ad recession, we expect GTN's top line will expand roughly 17% in 2008 to $361 million from $307 million in 2007 as the company benefits from roughly $60 million in political ad spending and the 2008 summer Olympics. We expect EPS to return to profitability and for EBITDA to grow roughly 68% to $118 million from a little less than $70 million in 2007.
At $2.90 GTN shares imply an EBITDA value 7-8x our 2008 estimate which is a discount multiple and is unwarrented in our view. GTN has better operating margins than many of its competitors and we think a 11x EV/EBITDA multiple is reasonable given GTN's low cost structure and exposure to political advertising.
A 11x Multiple implies an enterprise value of roughly $1.3 billion and a $7.60 common stock price and with 170% upside to our target we encourage investors to BUY GTN shares.
Important Disclosure: Richard Tullo has a long position in GTN shares.
