August 10, 2018 / 11:03 AM / a year ago

Wall St Week Ahead-U.S. broadcasters in line for political ad windfall

    By Sinéad Carew
    Aug 10 (Reuters) - Local TV companies such as Sinclair
Broadcast Group          and Gray Television         are set for
a significant political advertising boost this year as
candidates and special interest groups are spending heavily to
woo voters in mid-term elections. 
    Demand for commercial airtime is particularly strong ahead
of elections for one third of the U.S. Senate seats, and all 435
House of Representatives seats as well as positions such as
state governorships, because U.S. President Donald Trump's
Republican party is fighting to keep its majority in both houses
of Congress while Democrats are battling to turn the tables. 
    Politicians and their supporters from both political parties
are looking to win voters with their stances on hot button
issues such as gun control and abortion rights.            
    "There's a lot of excitement and probably a lot of paranoia
and a lot of fear, and those things drive political dollars,"
Kevin Latek, chief legal and development officer at Gray
Television, told investors on Tuesday, according to a conference
call transcript.
    Gray posted second-quarter political ad revenue of $18.1
million, 20 percent above the high end of its forecast and 9
percent above the same quarter in 2014, the last mid-term
election year. Political ads brought about 7 percent of total
second-quarter revenue at Gray, which forecast a third-quarter
range of $41 million to $45 million for the segment versus $41
million in 2014.     
    After reporting bumper second-quarter political revenue on
Wednesday, Sinclair raised its 2018 target for the segment to
$160 million from a range of $140 million to $150 million. The
new target would be 5.8 percent of total revenue, according to
analyst estimates compiled by Thomson Reuters data. 
    Of course the momentum could change as 80 percent of
political ad spending typically occurs between the start of
September and election day, which is Nov. 6 this year. But
analysts are hopeful the early strength will continue.
    "It looks like its going to be a record year even without a
Presidential race," said Daniel Kurnos an analyst covering
broadcasters at Benchmark Company.
    For 2018, political advertising could generate $2.4 billion
revenue for local broadcasters compared with $2.1 billion in
2014, according to Kantar Media CMAG unit's latest forecast
issued in 2017. Steven Passwaiter, vice president and general
manager at CMAG, said he aims to update the estimate this month.
    The 2016 U.S. presidential election generated $2.85 billion
for local broadcasters, according to Passwaiter. The
presidential race tends to attract more advertising dollars than
local mid-term battles but 2016 spending was much weaker than
expected as Trump relied far more on free media than past
candidates. (
    That disappointment, which pummeled broadcasters shares in
2016, is fuelling hopes that forecasts are more solid this year.
    "Everybody got burned two years ago because the presidential
spend turned out to be a dud. I think these guys are going to be
incredibly careful not to raise expectations to disappoint the
street again," said Passwaiter. 
    Gray Television shares rose 14.8 percent in the two sessions
after its Aug. 7 quarterly report. In 2016, the stock fell 24.7
percent from June to October.
    Sinclair's shares rose 4 percent on Wednesday after its
report, although enthusiasm was dampened by the collapse of its
effort to buy Tribune Media         .             
            Sinclair stock fell 20.6 percent from June to
October in 2016. 
    Another local broadcaster E.W. Scripps        , rose 5.7
percent after it reported results on Aug. 3 including political
ad revenue of $14.9 million, compared with $7 million pro forma
political revenue in the 2014 quarter. Political brought 5.3
percent of its total second-quarter revenue.
    Investors are careful about making bets on political revenue
for broadcasters as it only shows up every two years, before
elections and is unpredictable. 
    The amount a broadcaster generates varies a lot in election
years as it depends on how many of their stations serve
battleground states where campaigns spend heavily in a
particular year for reasons such as close polls.
   Also, strong demand for political commercials tends to eat
into core advertising revenue from clients like carmakers as
broadcasters only have a finite number of timeslots, said Leo
Kulp, analyst at RBC Capital Management. 
    But even if broadcasters can't bank on future political
windfalls, a strong season is still a big positive, according to
    "What it does is help generate incremental free cash flow.
It's going to translate to the companies deleveraging more and
giving them more capacity to do M&A," he said.

 (Reporting By Sinéad Carew
Editing by Susan Thomas)
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