Some very exciting pockets of value are starting to appear in the market. While the outlook for the economy seems incredibly uncertain right now, Warren Buffett (Trades, Portfolio) has always invested with the mentality that the macro environment does not really matter, and that is something we should keep in mind when analyzing potential investment opportunities.
One company that has recently appeared on my radar is broadcast and media company Sinclair Broadcast Group Inc. (SBGI, Financial).
A dirt cheap stock with lots of assets
I will start with why I like this company before I move on to analyze its fundamentals in depth.
The stock immediately looks cheap. Based on the fact the company has generated free cash flow per share of $7.12 on a trailing 12-month basis, it is currently selling at a price-to-free cash flow ratio of just 3.1.
That seems incredibly cheap. What’s more, it is trading at an enterprise value to earnings before interest, tax, depreciation and amortization (EV/Ebitda) ratio of 0.9.
Once again, that seems incredibly cheap compared to the rest of the market and the publishing and media sector. The reason why I am concentrating on these cash flow figures rather than profitability is that, like any media and infrastructure business, the company's profit figures are distorted by depreciation and capital spending numbers.
For example, for the financial year ending December 2020, Sinclair reported a net income of -$2.5 billion but reported cash from operating activities of $1.6 billion after backing out non-cash items. In 2021, a negative net income of $300 million became a positive operating cash flow of $300 million after removing non-cash adjustments.
The company looks cheap at first glance, looking at cash flow, but it becomes even cheaper when we take a look at the value of its investment portfolio.
Sinclair is an interesting business because in addition to having a broadcasting division, it has also made significant investments in real estate, venture capital and private equity. According to its latest investor presentation, these assets are worth approximately $18 per share and have generated an internal rate of return of approximately 24% since 2014.
These assets exclude the rest of the media business. Considering the current stock price of $22.50, that implies the market is valuing the media business at approximately $300 million. To put that number into perspective, the broadcast business generated $200 million of adjusted Ebitda in the first quarter of 2021.
Based on these numbers, it is no surprise that in the company’s own investor presentation for the first quarter of 2022, it notes:
“STOCK PRICE REMAINS HIGHLY UNDERVALUED - Sum-of-the-parts value estimated at approximately triple current stock price.”
And management is taking action to try and unlock shareholder value.
At the end of the fourth quarter, the company's consolidated cash was $521 million (that is against the market capitalization of around $1.5 billion at the time of writing). Sinclair repurchased 2.5 million shares of common stock in the first quarter and has continued to reduce the number of shares outstanding, acquiring an additional 1.1 million shares as of the last account.
In these purchases alone, the company has retired around 5% of its outstanding shares so far this year. On top of these cash returns, the company hiked its dividend to 25 cents per calendar quarter in the first quarter, giving a dividend yield of 4.4% on the current share price.
Put simply, not only is Sinclair cheap, but management is also trying to do something about it. That is why I think it could be worth considering this undervalued media player. If the company continues to return cash, it is only a matter of time before the market catches up.
