2023-08-21 22:46:54 ET
Summary
- Gray Television's stock has lost two-thirds of its value since early 2022, creating an opportunity for brave investors.
- The company has a large number of well-received TV channels, with one channel in the top spot in 70% of its markets.
- Gray's high debt levels and concerns about the TV industry have led to a lack of faith from investors, but its cash generation and growing revenues indicate potential for upside.
- It trades for 3 times its earnings and less than 1 time its operating cash flow. Paying off some debt can unlock a lot of value, and the company has the resources to do so.
Gray Television ( GTN ) is an Atlanta based company that owns and operates more than a hundred TV stations in 113 markets with a reach of 36% of TV-watching households in the US. The company also creates and owns digital assets to be released on online platforms as an alternative to traditional TV. The company's stock has been heavily punished in recent years where it lost two thirds of its stock value since early 2022 which actually created a pretty decent valuation for the small cap stock. This may be time to buy the dip for brave investors whose risk tolerance is higher than average.
The company owns or operates a large number of networks and its channels seem to be well received in most markets. The company reports that one of its channels are in Top 1 spot in 70% of the markets it operates in and one of its channels are either in Top 1 or Top 2 spot in 86% of the markets which is pretty impressive.
Gray Television Coverage Map (Gray Television)
But this success didn't come cheap. The company has about $6.5 billion of debt as compared to its total market cap of $750 million as it had to borrow a lot of money to fund its growth. This is probably one of the biggest reasons why investors have little faith in the company and they have been selling the stock for a period of 2 years now. Currently the company's profits and cash flows are able to cover its debt interest payments but investors are worried that this might not be the case once the company starts rolling its older debt and ends up refinancing at much higher interest rates because of higher overall rates in the environment plus the fact that they have too much debt.
Luckily the company doesn't have a lot of debt maturing anytime soon. The soonest debt maturity will occur in 2026 and interest rates might drop between now and then. The company might be fine as long as it doesn't keep taking on more debt between now and then.
Gray Television Debt Maturity Schedule (Gray Television)
As of the last 12 months, the company was able to generate close to $1 billion from its operations. Since the company's total market cap is $750 million, this gives us a price-to-OCF (operating cash flow) ratio below 1 (0.78 to be exact) which indicates extreme undervaluation. More importantly, if the company can keep this up and keep generating this much cash, it can easily pay off most of its debt before its due but again this means it shouldn't be taking on any more debt until the old debt it at least partially paid off to a more manageable level.
The company's current P/E ratio is 3 as compared to its 5 year average of 12, which tells us how little faith investors have in this company. Apart from its high debt levels, investors are also worried about the TV industry as a whole. Many investors seem to think that online streaming is taking over and no one will ever watch traditional TV networks ever again but Gray Television's healthy levels of cash generation and growing revenues indicate that there is still a lot of money to be made in this industry. Since the company's valuation appears to be so cheap, even a slight beating of expectations can unlock a lot of upside in the stock.
Gray Television sees political advertisements as a cash cow and the company is able to generate a lot of money from these advertisements. The company was able to generate more money per household from political ads that any of its competitors by a large margin in both 2020 and 2022 election cycles. In 2022, Gray was able to generate $14.66 per household as compared to TEGNA generating $9.13, Sinclair generating $8.73 and other competitors coming from far behind. Since we are approaching another major election cycle in 2024, there is at least some reason to be optimistic about the company's short-term prospects.
Gray Television Political Ad Revenues (Gray Television)
In the chart below you can see the 5-year trend in Gray Television's operating margin and its profit margin. Notice how the two margins were very close 5 years ago but the gap between the two kept growing and growing over the years. This is because the company's debt grew and its interest payments started eating into its profits. If the company had no debt it would enjoy a very healthy and solid profit margin around ~20% but now its profit margin is in mid-single digits because of interest payments.
The company now pays about $407 million in annual interest payments of its debt and this is without paying off any principal. This needs to be dealt with if the company wants to unlock value for shareholders.
The company shares some of its profits with investors in shape of dividends. Since it started paying dividends a few years ago, it built up a dividend yield of almost 4%. This dividend yield growth didn't come from dividend growth but rather from share price collapsing. Currently the company distributes 30% of its profits in dividends. One can't help but wonder why it's not spending this money on reducing its debt instead?
There is no question (and no way to sugarcoat) that the company has too much debt and it needs to get serious about paying off at least a portion of this debt fairly soon. The company has the cash flows and profitability to make this happen. Moving forward this needs to be a big priority for the company. If it can reduce its debt levels in a meaningful way, it will be able to unlock a lot of potential value for investors considering how cheap its valuation is if you don't count its debt levels.
The company currently trades for only 3 times its net income and less than 1 time its operating income. This valuation is compellingly cheap as long as we see signs that the management is working on reducing its mountain of debt and deleveraging the company significantly.
For further details see:
Gray Television Can Unlock A Lot Of Shareholder Value By Simply Paying Down Its Debt