SMIG - Nexstar Media Could Be The 'Next Star' In Your Portfolio

• Nexstar Media’s geographic reach attracts both national and local advertisers.
• That large footprint also gives the company leverage when negotiating retransmission agreements.
• The upcoming elections will drive revenues, more than offsetting macroeconomic headwinds.
• Nexstar Media’s debt profile is worrisome.

This article was coproduced with Chuck Walston.

I have a passion for investing, which keeps me on the prowl for new ideas. Two years ago, a Seeking Alpha reader recommended that I investigate Nexstar Media Group, Inc. ( NXST ). Aside from providing a ticker, his comment gave no other insights into the stock.

I began my inquiry without the faintest knowledge of the stock. The following is an excerpt from the article that was spawned by my investigation.

I groaned, “This company runs TV stations!”

I equate TV stations with the proverbial buggy whip.

Who wants to invest in a dying medium?

After all, everything is going to the internet and the cell phone. I knew from investigations in tech companies that advertising is going digital. TV stations?

The nation is moving to streaming!

Nonetheless, I dug a little deeper.

Guess what?

I was wrong.

Your local TV stations are flourishing. The trend is in their favor, and the future is bright.

After a due diligence study, I rated the stock as a Strong Buy . Roughly two years have passed since the article’s debut, and the total return for NXST is 128% in that timeframe , roughly five times that of the S&P 500.

A bit over a year later, I once again rated Nexstar as a Strong Buy . To the best of my memory, that marks the one and only time I’ve rated a stock as a strong buy in back-to-back articles. The outcome?

Total return for NXST since August of 2021 is a positive 32%. Meanwhile, the S&P 500 is down by over 8%. Once again, Nexstar outperformed the broader market, and by about a four-to-one ratio.

While NXST is technically a company that operates TV stations, it is evolving to include a digital platform. Furthermore, the business model for local television has changed dramatically over the last decade.

Suffice it to say, there is much more to NXST than meets the eye.

A Brief Overview

Nexstar is the largest broadcast group in the U.S. and the top producer of local news programming. NXST operates 200 stations in 116 markets. Altogether, 68% of U.S. households have access to one or more of the firm’s stations. The company's scale means it attracts national advertising campaigns as well as local advertisers.

The FCC has a cap on the percentage of the industry any one firm can control. NXST has reached that limit, therefore, the company cannot grow via acquisitions, at least not in the traditional sense.

However, Nexstar can divest and acquire local stations to gain a better overall position in the market. When I first reported on NXST two years ago, the firm operated in six of the top 25 markets. Today it has a footprint in 17 of the top 25 markets.

Revenues for local stations were once primarily derived from TV advertising, but today just a third of net revenue is derived from that source. For a number of years, NXST garnered over half of its total revenue from distribution

NXST also operates 120 local websites with 239 local mobile apps. These apps offer hyper-local content and provide another venue for a differentiated source of advertising income.

The Hill and BestReviews are Nexstar’s digital outlet. Collectively they are the seventh largest digital news and information property in the U.S. This ranks it above the digital outlets for Fox News and the NY Post.

Q2 Results Provide Important Insights

Late last week, Nexstar reported Q2 22 earnings , providing a beat on the top and bottom line.

Revenue of $1.25 billion was up 10.6% year-over-year, and beat consensus by $20 million.

GAAP EPS of $5.56 beat by $0.50.

The company set an all-time high second quarter net revenue of $1.25 billion. The results were driven by strong year-over-year growth in political advertising and distribution and digital revenues.

NXST also set a new record for second quarter adjusted EBITDA of $486.3 million and free cash flow of $219 million.

Total television advertising revenue grew by 15.7%.

Digital revenue increased approximately 20% year-over-year to $88 million.

Distribution revenue of $646 million set a new record for a second quarter, up 4.7% year-over-year. This was largely driven by improved terms on distribution agreement renewals in 2021, as well as annual rate escalators.

However, there is an aspect of an investment in Nexstar that quarterly numbers do not readily reveal. The following excerpt (emphasis supplied) from the latest earnings call addresses this strength.

For several years now, over 50% of our total net revenue has been derived from distribution revenue. This contractual and recurring high-margin revenue source has historically been resistant to periods of economic downturn. With only 33% of our total net revenue derived from core television advertising, we are simply less dependent on this revenue source than ever before.

Perry Sook, CEO

While many companies that rely on advertising see revenues drop during economic downturns, Nexstar is insulated by the contractual basis of its distribution revenue.

Sook also addressed other aspects of the business and the impact the current macroeconomic environment is having on revenues.

First, approximately half of our television advertising categories are pacing up for the quarter. The station categories that are pacing up the most in third quarter to date include some of our most stalwart categories such as attorneys, drugstores, home repair, manufacturing as well as telecom and entertainment. The categories that are pacing down the most in Q3 include sports betting, insurance and government services, most of which is unrelated to the economy.

Based on what we're seeing, there is little to suggest that the current macroeconomic uncertainty will have a material impact on our business.

Broadcast TV Is Dying! Au Contraire

In the opening of this article, I conveyed how my initial reaction was to view broadcast television as akin to the proverbial buggy whip…a business caught in an unending secular decline. However, my research made me rethink my position. From that piece, I provided my perspective on that topic:

I noted that the number of households that use a digital antenna to receive transmissions from broadcast stations increased by 50% from 2010 through 2018, and that 14% of U.S. households watched TV over the air.

More importantly, studies by Nielson indicate over-the-air (OTA) television viewing is increasing at a dramatic pace. Over the last 8 years, OTA has increased by 48%, and 14% of US households now receive TV over the air.

Of course, trends can reverse or lose momentum.

So where does OTA TV stand today?

A recent Nielsen report has the number of U.S. homes using OTA at 18.6 million as of the fourth quarter of 2021. That is an increase of 2.6 million since the second quarter of 2018, an increase of roughly 16% in two-and-a-half-years. That also represents a 50% growth rate in the number of homes using an antenna over the last twelve years.

Furthermore, evolving technology is likely to drive additional growth in the number of households using OTA.

Developments Driving Growth

NextGen TV (also referred to as ATSC 3.0) is an enhanced broadcast television technology. NextGen provides better reception, theater quality sound, and a 4K HDR picture, as well as more channels, mobile viewing on the go, and on-demand internet content.

A study by BIA Advisory Services notes broadcaster expansion into high-speed broadband data transmission markets could generate up to $15 billion of revenue for the industry by 2030. That exceeds the current revenues generated by retransmission fees.

One catch to the new tech is that it requires TVs with built-in NextGen TV tuners. LG, Sony and Samsung are examples of companies that have been selling NextGen TVs over the last couple of years.

As an Internet Protocol based system, it can carry internet content and services along with an over-the-air broadcast signal. With the aid of an app, it allows viewers to watch preferred content using cell phones, tablets and OTT devices.

The interactive qualities of NextGen will enable targeted advertising, build a differentiated source of revenue for broadcast TV operators, and provide inroads into digital advertising.

Since NextGen technology generates signals capable of transmitting over greater distances and deeper into structures, it will increase the reach of stations that adopt the technology.

NXST management previously stated it would rollout NextGen to half of U.S. TV households by the end of 2022. In effect, NextGen increases the size of Nexstar’s consumer base wherever this technology is in place.

The upcoming elections will also serve to boost Nexstar’s revenues. Nexstar’s broad geographic reach combines with the local nature of the individual television stations to create a prime advertising avenue for local, statewide and national political candidates.

Consequently, the company experiences surges in advertising revenue during election cycles. Of those races that are considered competitive, 80% will be contested within Nexstar’s footprint.

Once again, I turn to the last earnings call (emphasis supplied):

Our political revenue is also pacing more than 40% ahead of 2020 year-to-date levels, setting us up nicely as we head into the second half of the year. Importantly, fundraising, which is a key indicator for political ad spend, increased 76% over Q2 2018 according to the Federal Elections Commission.

We expect fundraising levels to accelerate as we move through the year given those positive trends and recent events. Together, these factors reinforce our confidence that we will generate record midterm election net political advertising revenue for 2022, meaningfully exceeding pro forma 2018 levels.

BIA Advisory Services predicts political advertising will boost the local TV ad revenue to $21 billion in 2022. BIA forecasts $3.4 billion in OTA political ad revenue in 2022.

I previously touched on the role retransmission fees play in driving Nexstar’s growth. Retransmission fees are payments to local TV by cable, satellite and streaming services to transmit programs to their respective platforms. Those payments are shared by the major broadcast network and the local broadcaster.

Retransmission fees are driven in part by cable companies’ need to dull the cord-cutting phenomenon. A study of cord cutters determined 23% missed live events, 22% wanted a service that provided local and national news, and 19% wanted to watch local sports.

S&P Global forecasts major OTA operators will see a low to mid-teens net retrans growth through 2024.

Nexstar is also making headway in its digital business. Q2 digital revenue increased roughly 20% year-over-year from $73.4 million to $88 million.

Although the following developments will not affect revenue growth, they could lead to share price appreciation.

Nexstar is eliminating the company’s B and C class shares. By ridding the firm of dual-class stock, NXST becomes eligible for index funds that were previously precluded from investing in the company.

Nexstar’s board approved a $1.5 billion share repurchase authorization. Considering the market cap stands at $7.64 billion, the buyback program means a good chunk of the stock will be retired. It also signals management’s belief that the shares are undervalued.

Debt, Dividend, And Valuation

Those who follow my work are aware that I emphasize a company’s financial foundation. Herein lies my greatest concern when I consider investing in NXST.

Nexstar's outstanding debt at the end of Q2 was $7.23 billion. The total net leverage at quarter’s end was 3.32x. While that is an improvement over the 3.7x leverage reported at the end of 2021, and 3.43x in Q1, it is still uncomfortably high in my opinion.

During Q2, the company refinanced senior secured term loans and revolving credit facilities, thereby reducing annual cash interest expense by approximately $10 million and extending debt maturities.

Nexstar’s corporate credit is rated Ba3 / BB . That translates into the non-investment grade speculative range. In fact, Ba3 is one step above the credit ratings that are considered highly speculative.

I am invested in over 100 stocks and ETFs, and NXST is the only company I own that does not have investment grade credit ratings.

The current yield is 1.86%, and the payout ratio is a bit below 15%. The 5-year dividend growth rate is 24.26%.

Nexstar has a forward P/E of 7.47x, well below the stock’s 5 -ear average P/E ratio of 10.5x. The company's 5-year PEG ratio as provided by Seeking Alpha is 0.45X. Yahoo! Finance calculates the 5-year PEG at 1.54x.

NXST currently trades for $195.84 per share. The average one-year price target of the 5 analysts rating the stock is $210.57. No analyst has rated the stock since May of this year.

Is Nexstar a Buy, Sell, Or Hold

To kinda, sorta misquote Mark Twain, the rumors of the death of broadcast TV are greatly exaggerated. OTA TV adoption is growing, and NextGen TV is serving to bolster that phenomenon. I have to wonder if tough economic times might create an additional catalyst for consumers to adopt more free TV.

It is well known that companies that rely on advertising revenue can be hard hit during economic downturns. However, Nexstar receives over 60% of its revenues from other sources. Furthermore, the upcoming election cycle is expected to provide a big bump in advertising spend.

Over the long term, core ad revenue will fall on an organic basis; however, some of this loss will be mitigated by Nexstar’s digital platform.

I readily admit that the company’s financial position is worrisome. This is not a sleep well at night ("SWAN") investment at this juncture ; however, NXST has substantial free cash flow and is working to lower its debt load.

I should add that Nexstar’s debt came through management’s well-planned expansion of the company over the years. Nexstar had 20 stations in 2002. The Media General merger in 2017 added 65 stations and the Tribune merger in 2019 added an additional 31. The Tribune deal made Nexstar the #1 broadcast affiliate for Fox and CBS and the number two partner for NBC and third largest for ABC.

I rate NXST as a BUY.

Nexstar is trading at a reasonable valuation. I believe the large buyback program in place signals the level of confidence management has in the company’s future. I’ll add that once NXST lowers the debt level, we could see robust growth in the dividend.

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