MEDIA SECTOR REVIEW Gone Too Far? While we were anticipating a difficult market for media stocks in the fourth quarter and warned investors to be cautious (report entitled Climbing the Wall of Worry" dated 10/9/18), none could have predicted the devastating stock price performance. The general market as measured by the INSIDE THIS ISSUE S&P 500 Index declined by 6% for the year and by 14% in 4Q 2018. While all media sectors were down in the quarter, the notable weak performance was in the radio sector, which fell a Outlook: Traditional Media 2 whopping 29%. Notably, the Noble Radio Index finished down a stunning 46% for the year. TV 4 We believe that the genesis of the poor quarterly media sector performance was concern over Radio 5 the health of the U.S. general economy, especially given weakening Europe and Asian economies Publishing 6 and the U.S economy nearing a record 120-month recovery. Not surprising, cyclical media Industry M&A Activity 7 stocks, especially those with some debt leverage, came under intense selling pressure. With Outlook: Internet and Digital Media 8 debt leverage in the relatively high range of 4.5 to 5.5 times for many radio companies, the radio Digital Media 10 sector was hard hit. In our view, the decline was exacerbated by year-end tax loss selling and Advertising Tech. 11 quarter end portfolio positioning. Notably, we believe that the advertising environment is not as Marketing Tech. 12 weak as the stock prices might suggest. Retail and auto seem to be showing favorable signs into Social Media 13 the first quarter 2019. In our view, some of the severely beaten down radio stocks, those with Industry M&A Activity 14 some debt leverage, appear to be oversold. Noble Overview 16 We would look for a New Year bounce in many media companies, with the bounce likely more pronounced in the Radio sector. TV stocks should benefit from continued elevated M&A activity, despite weak fundamentals in 2019 with the absence of political advertising. In our view, investors likely will look into the future with an eye on the anticipate heavy political advertising in 2020 (which may begin as early as the fourth quarter 2019). We believe that the publishing sector will largely be event driven. Investors likely will pay attention to potential acquisitions, which hopefully position into faster growth businesses. As such, investors should focus on companies with clean balance sheets, capable of making acquisition fueled growth. STOCK MARKET PERFORMANCE: TRADITIONAL MEDIA 20% 10% 0% -10% -20% -30% -40% -50% Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 S&P 500 Noble TV Noble Radio Noble Publishing NOBLE Capital Markets, Inc., dba NOBLE Capital Markets is a FINRA registered broker/dealer. Member - SIPC (Securities Investor Protection Corporation). Refer to the segment analysis part of the Newsletter to see the components of NOBLE Media Segment Indexes VOLUME 8, ISSUE 4 l JANUARY 2018 MEDIA SECTOR REVIEW l 1 OUTLOOK - TRADITIONAL MEDIA TELEVISION BROADCASTING Looking for another round of M&A In the latest quarter, many of the earlier announced merger deals were closed, including the Gray Television (GTN: Rated Outperform) and Raycom merger on January 2, 2019. In addition, a widely anticipated $7.1 billion merger deal with Nexstar (NXST: Not Rated) and Tribune Media (TRCO : Not Rated) was announced on December 3rd. In our view, deal activity supported the television stocks in the latest quarter. As a result, the Noble TV Index was down roughly in line with the market in the fourth quarter, down 15% versus the general market, down 14%. We believe that there will be another round of deal activity likely to be announced in the first half 2019, which should further heighten interest in TV stocks. Among the higher profile merger announcements to watch include the Fox Sports Network and Cox Television Group. In addition, there will be television stations to be sold from the Nexstar/Tribune Media merger. The station sales should enable a quick regulatory review of the deal. In our view, heightened M&A activity will buoy TV stocks in 2019. As such, we expect that the TV group likely will be event driven in the near term. There will not be a lot of fundamental support for the stocks, given the expectation of weaker fundamentals in 2019, a function of tough comparisons from a stellar political advertising environment in 2018. Aside from M&A activity, we anticipate that investors will begin to focus on the likely strong political season in 2020, which may begin as early as the fourth quarter 2019. There are indications that a large number of Democrats may run for President in 2020. As a result, candidates likely will spend heavily into the primary season to distinguish themselves. While we continue to focus on our favorites Gray Television, E.W. Scripps and TEGNA, we believe that investors have largely overlooked Entravision. Near current levels, the EVC shares trade a significant discount to the broadcast group and has a compelling dividend yield. RADIO BROADCASTING Appears Oversold The radio industry had a disastrous 2018, capped with a stunning 29% drop in stock prices in the fourth quarter. For the year, Radio stocks were down a staggering 46%. We believe that the weakness was largely related to concerns over the health of the U.S. economy, fueled by a rising interest rate environment, exacerbated by year-end tax loss selling. High debt levered radio companies seemed to take the brunt of the stock sell-off, particularly those that were levered in the 4.5 to 5.5 debt to cash flow range. Stocks with the most meaningful latest quarter moves were Beasley Broadcasting (BBGI: Not Rated) down 46% for the quarter; Townsquare Media (TSQ: Rated Outperform) down 48%; and Salem Media (SALM: Rated Market Perform) down 39%. The shares of Entercom (ETM: Not Rated) were down 28% in the quarter, but for the year was down 47%, in line with the industry. With the recent pullback, the radio stocks appear to be trading at recession type valuations at roughly 6.7 times enterprise value to estimated 2019 cash flow. We believe that the current fundamental environment appears more constructive than the stock prices might suggest. Retail and auto advertising categories appear more resilient into the first quarter 2019. Nonetheless, the industry still faces challenges from data driven advertising mediums, even as the industry tries to develop some applications to address its data deficiencies. We are mindful of the prospect of a classic "value trap" even as we become more constructive on some stocks in the industry based on valuation. For the most part, our valuation assumes that free cash flow will be used to pare down debt, which, in turn, should improve equity values. Such a prospect, should allow for a compelling return from near current levels. Consequently, we have recently raised our rating on Cumulus Media from Market Perform to Outperform. VOLUME 8, ISSUE 4 l JANUARY 2018 MEDIA SECTOR REVIEW l 2 OUTLOOK - TRADITIONAL MEDIA PUBLISHING Thawing M&A environment? The publishing sector narrowly outperformed the general market in the fourth quarter, down 13% versus a 14% decline for the general market as measured by the S&P 500 Index. We believe that the stocks were buoyed by a possible merger with McClatchy (MNI: Rated Market Perform) and Tribune Publishing (TPCO: Rated Outperform). But, without any news, such a merger appears increasingly less likely as time passes. The publishing stocks held up remarkably well against the backdrop of a largely disappointing third quarter. Most of the publishing companies were adversely affected by tariffs on Canadian newsprint, which pushed newsprint prices to soared over 25% in the quarter. The outlook for newsprint prices is much more favorable in the fourth quarter, as the tariffs were rolled back. As such, we believe that ongoing cost restructuring efforts will become more evident in the fourth quarter. There is a disparity of debt leverage among the players in the industry, as the chart below illustrates, with Tribune having the cleanest balance sheet following the sale of its California newspaper group. In addition, we believe that the company is among the best positioned to make acquisitions to fuel the transition to faster growth businesses. Given the strong cash flow and clean balance sheet, we continue to believe that the company is a potential takeover candidate. VOLUME 8, ISSUE 4 l JANUARY 2018 MEDIA SECTOR REVIEW l 3 TV – SEGMENT ANALYSIS % of LTM Ent. Value / Net 3 Year Share 52 Week Market Net Ent. Revenues EBITDA Revenues EBITDA Debt / Revenue EBITDA Dividend Value Price High Cap ($M) Debt ($M) ($M) ($M) LTM 2018E 2019E LTM 2018E 2019E EBITDA CAGR Margin Yield ($M) CBS Corporation $47.67 77.4% $17,839 9671 $27,516 $14,411 $3,138 1.9x 1.9x 1.8x 8.8x 8.3x 7.8x 3.1x 3.0% 21.8% 1.5% Nexstar 80.41 89.6% 3,715 4,030 7,768 2,622 961 3.0x 2.8x 2.9x 8.1x 7.8x 8.7x 4.2x 56.8% 36.6% 1.9% Tribune Media 45.54 100.1% 3,994 2,037 6,036 1,920 557 3.1x 3.0x 3.1x 10.8x 9.7x 12.6x 3.7x 1.3% 29.0% 2.2% Sinclair 28.39 70.7% 2,762 2,879 5,603 2,972 813 1.9x 1.8x 1.9x 6.9x 6.1x 7.1x 3.5x 11.4% 27.4% 2.9% TEGNA Inc.