2023-03-23 12:13:12 ET
Summary
- GTN is a leading owner of local TV stations affiliated with all 4 of the big 4 networks.
- GTN historically does well during election years due to political advertisements.
- The company's heavy $6.4 billion debt load should be manageable as long as the economy does not enter a serious recession.
- With an estimated $800+ million in free cash flow over the next two years, equity holders could see the stock double even if valuation stays the same.
Gray Television, Inc. ( GTN ) caught my eye as the company had fallen to 52-week lows while sporting a 2.0x trailing twelve month P/E multiple.
GTN is a leading owner of local television stations serving 113 markets. The business has been built over the past decade through multiple acquisitions that have saddled the company with $6.4 billion in debt. However, the local TV business is highly lucrative, and GTN's debt load should be manageable as long as the economy does not fall into a serious recession like in 2008. Over the next two years, GTN is estimated to generate over $800 million in free cash flow, which I believe could double the company's equity value.
I think GTN is a speculative buy for long-term investors who are not afraid of the heavy debt load.
Company Overview
Gray Television, Inc. is a leading owner of local television stations in the U.S. Gray owns stations in 113 markets reaching 36% of TV households, with Gray having a #1 or #2 market share in 89% of the markets. Gray owns and/or operates stations for all four of the big-4 networks (Figure 1).
Revenues for GTN are primarily derived from Advertising (52% of 2022 revenues) and Retransmission fees (43% of 2022 revenues) (Figure 2).
Politics Is Good For Business
One of GTN's core strategies is to operate in markets with the potential for significant political advertising revenues in periods leading up to elections. In fact, GTN's political revenues per TV household far outstripped its peers in each of the two prior election cycles in 2020 and 2022 (Figure 3).
With the acquisition of Meredith Local Media Group ("Meredith") in late 2021, GTN appears well positioned for the next election cycle in 2024, which will combine a presidential election with multiple senate races and gubernatorial races (Figure 4). On a combined historical basis, GTN had over $600 million in political advertising revenues in 2020.
But The Company Is Saddled With Debt
However, between now and the 2024 political season, Gray Television will have to work through a bloated balance sheet, as the company has accumulated an enormous debt load from buying competing TV stations over the past decade. For example, in 2021, GTN acquired Meredith for $2.8 billion, financed with $1.3 billion in 2031 Notes and $1.5 billion in term loans.
In total, GTN has $6.4 billion in long-term debt outstanding against a market capitalization of only $800 million (Figure 5).
Fortunately, the company does not have any near-term maturities, with the exception of the Term Loan B that was recently repaid on March 1, 2023 (Figure 6). This gives the company some breathing room to earn free cash flows and pay down debt over the next few years.
Unfortunately, with such a heavy debt load and rapidly rising interest rates, GTN is susceptible to increased interest expenses. For example, interest expenses grew 73% YoY to $354 million in 2022 even though total debt outstanding declined from $6.7 billion to $6.4 billion (Figure 7).
To protect the company from further interest rate increases on its floating rate term loans, the company recently entered into interest rate cap agreements with Wells Fargo (WFC) and Truist (TFC) to cap the interest rate on its floating rate debt ($2.6 billion notional through 2024, then $2.1 billion notional until the end of 2025) to a maximum one-month LIBOR rate of 5% for aggregate fees of $32 million.
Underlying Business Is A Money Spinner
Putting aside the debt worries, GTN's underlying business has historically been very profitable, with the company earning positive operating profits every year except for 2008, during the Great Financial Crisis (Figure 8). GTN's operating margins averaged 19.7%.
Historically, GTN has been able to convert a significant portion of operating profits into free cash flow, ranging from 24% to 72% in the past decade (Figure 9). Note, free cash flows tend to be stronger during election years due to the boost in political advertising revenues which comes with better incremental margins.
So the key question for investors is how much free cash flow can GTN generate in the next three years to help pay down debt ahead of the wall of maturities beginning in 2026.
Financial Model Looking Forward To 2024
Wall Street analysts expect GTN to experience a modestly down year in 2023, followed by a strong 2024 due to the upcoming presidential election cycle (Figure 10). Importantly, the company is expected to generate $840 million in free cash flows over the next 2 years, which should help the company prepare to pay down the maturities that are coming due in 2026.
Valuation Is Cheap
Valuation-wise, GTN is dirt cheap, trading at just 2.0x trailing P/E (Figure 11).
However, as we mentioned previously, GTN's revenues and earnings are highly influenced by the election cycles, which means a trailing P/E may not be the best measure to view the business. Furthermore, GTN's highly levered balance sheet might skew valuation multiples that just look at earnings per share.
Instead, we should look at enterprise value-based valuation metrics, such as EV/EBITDA. On trailing EV/EBITDA, GTN still screens cheap, at 5.9x vs. the sector median of 9.7x. But on forward EV/EBITDA, which accounts for the upcoming down year in 2023, GTN is trading at 9.4x EV/EBITDA vs. the sector median at 8.5x.
Overall, I think GTN's valuation is fairly discounted for business fundamentals over two years. As we progress through 2023, I expect investors to start looking forward to 2024 fundamentals, which should make GTN screen attractive.
If Analysts Are Right, I Think GTN Stock Could Be A Double
Note, if the company can indeed generate $800+ million in free cash flows over the next two years, then even if the valuation stays constant at $7.9 billion in enterprise value, I believe common shareholders could see a doubling of the share price as net debt is reduced by the free cash flow and equity value is doubled to $1.6 billion (Figure 12).
Risks To GTN
In my opinion, the biggest risk to GTN is the macro environment, with inflation running hot and companies cutting back on expenses. Already, we have seen reports of mass layoffs at many high-profile technology companies like Amazon (AMZN) and Meta (META). Even companies in non-tech industries like Tyson Foods (TSN) and General Motors (GM) are looking to reduce headcount . The risk is that a round of belt tightening will inevitably lead to lower advertising spending.
Earlier in the year, Forbes estimated that advertising spending growth will slow to 5% YoY in 2023. However, with recent regional bank failures, that estimate might prove to be too optimistic.
Furthermore, with such a heavy debt load, GTN could be very susceptible to changes in advertising revenues.
Conclusion
Gray Television is a leading owner of local television stations serving 113 markets. Historically, GTN has been on a debt-fueled consolidation spree, culminating with the $2.8 billion acquisition of Meredith in late 2021.
The local TV business has historically been lucrative, with ~20% operating margins and high free cash flow generation. GTN's stock screens cheap due to the heavy debt overhang. If the bottom doesn't fall out of the advertising markets over the next two years, GTN is estimated to generate over $800 million in free cash flows. This could effectively double the market cap of the company as net debt is reduced and equity value is increased.
I think GTN is a speculative buy for investors with long investment horizons.
For further details see:
Gray Television: Highly Profitable But Debt Is An Overhang