Tribune: A comeback story hot off the press

Imagine the chance to own Time Warner's TBS before the cable network was fully distributed across the country. Or how about CBS before it had convinced cable companies to pay it several hundred million dollars a year to carry its network? Believe it or not, investors still have a similar opportunity: Tribune Co.

The company, which owns 42 TV stations along with newspapers including the Los Angeles Times and Chicago Tribune, emerged from a four-year bankruptcy in late 2012. Since then, Tribune has been below the radar of most investors because the stock trades over the counter and the company doesn't perform normal functions like investor conference calls.

Yet Tribune is on the verge of turning some of its sleepy assets into big moneymakers. First consider its portfolio of TV stations, which mainly includes affiliates of 21st Century Fox's Fox and The CW, a joint venture network between Time Warner and CBS. At the moment, those stations generate revenue from advertising, but they are probably earning far less than they should be.

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Flags fly in front of Chicago Tribune signage displayed on the side of the Tribune Tower in Chicago, March 28, 2014.
Photographer | CNBC

Here's why: Until several years ago, TV stations tended to have agreements with cable companies whereby the stations provided a signal in exchange for guaranteed carriage. Those deals didn't generally involve any money changing hands.

But the networks and stations recognized that they looked a lot like cable channels, which receive handsome sums from cable companies for the right to carry their content. Over time, networks began charging so-called retransmission fees in exchange for their signals. In some cases, the amounts have become massive: CBS expects to generate $2 billion in annual retransmission fees by 2020.

In contrast, many of Tribune's stations currently don't receive any retransmission fees at all. That's probably because the company was in bankruptcy over the last several years when other station owners were aggressively negotiating fees.

How far behind is Tribune? In 2012, Tribune's stations earned an estimated 10 cents per subscriber per month, estimates CRT Capital analyst Lance Vitanza. That compares with an average of 55 to 60 cents for affiliates of the big four networks, which continue to negotiate even higher rates.

Of course, a portion of Tribune's stations are affiliates of The CW, which has fewer viewers than the major broadcast networks so isn't likely to generate the same level of retransmission fees. But assuming Tribune can reach 50 cents per subscriber per month over the roughly 50 million households it reaches, the company could generate an additional $240 million in annual revenue. Almost all of that would be profit since the incremental costs are marginal.

Tribune's other big opportunity is WGN, a so-called superstation based in Chicago that reaches about 75 million homes, according to SNL Financial. WGN carries local Chicago-oriented content like Cubs and Bulls games, along with other filler material like comedy reruns.

The lack of desirable content, along with some technical issues related to its status as a superstation, have prevented WGN from reaching full distribution to 100 million pay-TV households.

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But WGN may soon have more appeal to cable companies. It has invested in a number of new original series that have a decent chance of becoming hits. The first, called "Salem," is loosely based on the Salem witch trials, but with real witches. The show has had mixed reviews but the first four episodes averaged 1.1 million viewers, according to Nielsen. To put that in context, even a hit like "Mad Men" averaged less than 1 million viewers during its first season.

Indeed, other networks like FX have made dramatic ratings improvements by introducing more original content and relying less on reruns. Even without "Salem," WGN appears to be drawing more viewers. During 2013, the network averaged 286,000 prime-time viewers, up from 245,000 in 2012.

WGN also plans to abandon its superstation network and become a regular pay-TV network, just as TBS did in 2004. That could make it easier for some distributors to make a deal with WGN.

How much earnings potential does WGN have? The network currently earns 6 cents per subscriber per month from cable companies, according to Nielsen. That compares with rates above 50 cents for the likes of FX and TBS. Even if WGN could raise its fees to, say, 15 cents and reached nationwide distribution to 100 million homes, it could earn an additional $100 million annually.

Tribune's print business, while not likely to grow much, could also provide a surprise windfall. The company plans to spin it off into a separately listed company this year, just as News Corp. did in 2013. Such a move allows print-focused investors to own one company and TV-focused investors to own the other; that often leads to a higher overall valuation. A suitor like News Corp. or Bloomberg might even take interest in some or all of the print company.

Analysts expect Tribune to generate just over $1 billion in earnings before interest, taxes, depreciation and amortization in 2014, indicating that new TV revenue would make a real difference. With the stock valued at about 9.5 times estimated EBITDA, there's plenty of room for gains if Tribune can bring its sleeping assets to life.

—By CNBC's John Jannarone.