Belo Corp. (BLC) owns 20 TV stations around the country (including two in Seattle named KING and KONG). They have a diverse portfolio of affiliates of the major TV networks. The company was founded in 1842 as a newspaper company, but in 2008 they spun off their remaining newspaper assets and became purely a television broadcaster.
Naturally, in 2008 and 2009 the downturn in the economy affected their revenues, which consist largely of advertising. As a result, the company has taken a number of noncash charges since 2008. However, revenues and earnings in 2009 have showed definite signs of recovery, with net revenues for the first three quarters of 2010 up 14.8% as compared to the same period in 2009, of which 11.9% came from non-political advertising.
The earnings picture of the company at least based on current earnings is attractive, with a P/E ratio of 10.07. The historical earnings picture has been greatly distorted by the large writeoffs of their intangible assets. This is a non-cash charge, and merely reflects the decline in revenues that we are already aware of. As such, it represents no actual cash loss to the holders, and therefore can be ignored when examining Belo’s earnings power (although we also have to reverse the tax benefit of the writeoffs as well).
In terms of Belo’s abilities to generate free cash flow, taking the writeoffs out for the first nine months of 2010, Belo produced $136 million in operating income, and an additional $16 million in excess depreciation, which is also a source of cash flow to equity holders. Interest owed over that period was $60 million, producing an interest coverage ratio of 2.5x. This leaves $92 million in pretax earnings, or say $55 million afterwards based on a 40% tax rate.
If we assume that the fourth quarter will show the same results as the other three (it may actually be better because of election ads and holiday advertising), we have $73 million in estimated cash free cash flow to equity for 2010 (see all conference call transcripts here). In 2009, free cash flow to equity was $65 million. Based on a market cap of $694 million as of the January 31, 2011 close, we have an estimated price/free cash flow ratio of 9.5x, which I consider to be attractive. Nor are these results atypical; looking back to 2005, Belo Corp.’s annual free cash flows have consistently been in the $60 to $80 million range once the effects of the newspaper company they spun off in 2008 are stripped out. Apart from impairments, they have never recorded a loss over that period.
On top of the non-cash writeoffs dealt with above, the major cause of Belo’s low valuation is their debt situation. Their total long-term debts as of their latest SEC filing total $949 million, most of which consists of bonds. $175 million of these bonds fall due in May of 2013, and an additional $270 million in November of 2016.
As I stated above, interest is covered about 2.5 times based on current results, and both sets of bonds now trade at a significant premium to par. Belo Corp. is very sensibly devoting the great majority of its free cash flow to paying down debt and, based on $73 million or so in free cash flow generating ability, their free cash flow is sufficient to pay down their 2013 bonds as they come due, and most of the 2016 bonds as well.
Belo Corp. has reduced long term debt by $80 million since the end of 2009, and by an additional $64 million in 2009 itself. Obviously, as they pay their debt down they increase owner earnings through savings on interest expenses, and they improve their borrowing capacity in the event of a large short-term need for cash. More importantly, they relieve the specter of financial distress that is now hanging over the company’s valuation.
Belo Corp. also announced recently that they have completed the process of severing their pension funds from the newspaper they spun off in 2008. They have disclosed that this will produce a noncash charge to earnings, but which will also significantly lower their future pension liabilities.
At any rate, Belo Corp. has regained its traction after the economic crisis, and shows positive indications of being able to manage its debt situation, being capable of paying down interest as well as keeping up with principal. Furthermore, it trades at an attractively low multiple to its existing cash flow, and we may expect this to expand as they pay their debts down. As a result, I would definitely recommend Belo as a candidate for portfolio inclusion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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