Summary
- Increased leverage, decreasing margins, and decreasing profitability all point toward poor returns for investors.
- Trades at a premium based on enterprise value parameters.
- Trades within fair value based on equity parameters.
- Non-investment grade credit rating and a very competitive and disruptive industry create large uncertainty for their future.
Thesis
Gray Television, Inc ( GTN ) demonstrates important recent negative trends for investors while there are positive aspects to be considered. The firm has improved in their cash conversion cycle and seems to trade within their fair value equity range based on multiple factors. The negative aspects include decreasing liquidity ratios, decreasing margins, and decreasing profitability ratios which when combined with an increase in leverage signal a weakening balance sheet and poor return potential for investors. The negative aspects could outweigh the positive from a quantitative perspective, and when combined with a speculative rated high credit risk, supports an argument for a Hold-Sell rating range depending on the risk appetite, portfolios, and strategies of individual investors.
Business Profile - Snapshot of Business Information
GTN is a television broadcasting company that owns and operates television stations and digital assets in the Media & Publishing Industry within the Communication Services Sector operating in the United States as of 1897. They have an Enterprise value of approximately $8.2 billion and a Market Capitalization of approximately $1.17 billion. They trade with a historical beta of 1.60 meaning that they portray substantially more volatility than the overall market.
Ratios - Providing Context to Recent Trends
When analyzing GTN, utilizing ratio analysis can provide powerful insights into their recent performance.
Liquidity Ratios - Can They Cover Their Short-Term Obligations?
GTN liquidity has decreased substantially since their high points between 2019 and 2021 which could be a red flag for investors indicating a lessening ability to cover their short-term obligations.
Their cash holdings in 2020 were $773 million and were at $144 million as of the last reports. GTN has decreased their current ratio from 5.11 in 2020 to 2.09 as of the LTM. They also decreased their cash ratio from a very healthy 3.03 in 2020 to a significantly low 0.32 LTM signifying a movement towards a weakened balance sheet and a lesser ability to cover their short-term liabilities. It is important for the firm to mitigate liquidity risk moving into a more uncertain future macro-environment and GTN has not trended in a positive direction.
Capital Structure Ratios - Increasing Leverage Could Increases The Risk or Reward for Investors.
The capital structure ratios of GTN show a trend towards a more leveraged balance sheet as they have been increasing their long-term debt and overall liabilities.
Evaluating the capital structure of GTN shows an increasing amount of leverage across all the ratios. The debt/equity ratio has moved from 2.18 to 3.33 signifying a faster growth in debt vs equity. The debt/assets ratio increased from 0.69 to 0.77 showing that debt is growing faster than assets. The equity multiplier increased from 3.18 to 4.33 meaning that the assets outgrew the equity of the firm. These ratios will affect the profitability of the different shareholders and the tax burden of company as determined by their capital structure. What this could signify is that GTN is increasing their leverage which increases their solvency risk though it could also result in increased profitability for shareholders if it is optimized appropriately.
Efficiency Ratios - Mixed Signals For Investors
The efficiency ratios show a slight improvement in the firm's ability to turn sales into cash though their ability to utilize assets for sales has declined.
The efficiency ratios show an adequate days sales outstanding ratio and a slightly increasing days payable outstanding ratio. This means that GTN is paying their bills over a slightly longer timeframe while receiving payments on a relatively equivalent timeframe. Theoretically, the cash conversion cycle (days sales outstanding - days payable outstanding) decreased over the discussed reported periods which is the time in days it takes for the company to turn its resources into cash. What this means for investors is that the company is taking less days to produce cash between 2020 and the LTM which can be perceived as a positive trend.
However, the firm shows a decreasing fixed asset turnover and total asset turnover which is a result of their proportion of sales to net fixed assets and total assets. This is a negative trend for investors and typically results in worsening profitability (all else remaining equal).
Profitability Ratios - Big Concern Moving Forward for Investors.
All of the margins contracted in some capacity since 2020. The return on assets (ROA) dropped from 5.36% to 2.66% and the return on equity (ROE) also dropped from 17.06% to 11.54%. This could signify that the leveraging referenced earlier may be less than optimal or that the business is struggling in respect to their costs ultimately resulting in largely concerning outcome possibilities for potential investors.
Dupont Equation - Worsening Profitability for Shareholders.
ROE is decreasing due to a worsening net profit margin though the relatively equivalent/slightly decreased total asset turnover, and improved equity multiplier attempt to maintain it.
The Dupont Equation can be utilized to help identify how the key drivers of shareholder return can be isolated independently (operating efficiency, financial leverage, and asset use efficiency). Breaking GTN into the relevant key drivers of net profit margin, equity multiplier, and total asset turnover, we can easily identify how the shareholder's ROE is changing. The net profit margins have decreased while the equity multiplier increased. This combined with a stagnant total asset turnover reveals a decreasing ROE through more debt, worsening operational efficiency, and equivalent/worsening asset use which is a bad sign for shareholders.
Discounted Cash Flow - Trading in the Middle of its DCF Range.
Utilizing a Discounted Cash Flow ((DCF)) Model for GTN allows investors to take a set of assumptions from the cash flow of the firm and determine an intrinsic value range. Utilizing analyst assumptions for growth, margins, and the derived WACC ranges as sourced from Finbox produces an implied intrinsic value for NXST between $5.95 and $20.68. This is a large range due to the WACC (discount rate) spread and does not incorporate a margin of safety, as it is the estimated fair value of GTN.
Comparable Company Analysis
Finding comparable companies and performing a Comparable Company Analysis allows investors to compare GTN to other similar firms in their industry/sector. The companies incorporated into this analysis are Nexstar Media Group (NXST), Tegna ( TGNA ), Sinclair Broadcast Group ( SBGI ), and The E.W. Scripps Company ( SSP ).
GTN trades around a current discount based on equity multiples though the future signifies potential negative price action.
Analyzing the equity values of the group as a whole helps portray valuable insights into the multiples at which GTN trades. GTN is one of the smaller firms by market capitalization and currently trades at a LTM P/E of 4.82x which is well below the mean around 8x. Forecasting into the Next Fiscal Year ((NFY) and above (NFY + 1)) shows that the analyst predictions of GTN move to a substantially higher P/E ratio compared to their industry (which increases as well) largely due to a significant EPS (GAAP) decline which is not ideal for investors considering that the price action may be driven down accordingly. GTN does trades at a current fair valuation in respect to their P/FCF with a value of 5.6x vs the industry 5.5x.
GTN trades around the average and with a slight premium for enterprise value metrics.
Analyzing the enterprise values and the relative multiples of the group as a whole helps portray valuable insights into the price at which GTN trades. GTN trades an above average LTM EV/Sales multiple (2.48x vs. 2.15x average) and also higher in the forecasted values compared to the peer group analyzed. They also trade average/above average in the past and predicted EV/EBITDA and EV/EBIT ratios while showing a strong LTM EBITDA margin compared to their peer group.
Valuation Ranges
Equity Valuation Football Field
The Equity Valuation Football Field shows a visual representation of the value ranges based on a variety of metrics. According to the data, GTN is trading on the lower side of its fair value based on its 52-week trading range and analyst 12-month targets. Using the comparable metrics discussed prior, GTN is trading slightly under to approximately fair value in comparison to the peer group represented above. According to the Equity Discounted Cash Flow Model, GTN is trading at a fair value. Summarily, according to the equity valuation metrics, GTN is currently trading around their fair value range.
Enterprise Valuation Football Field
The Enterprise Valuation Football Field shows a visual representation of the value ranges based on a variety of metrics. The enterprise valuation theoretically provides a different perspective as it negates certain effects of capital structure that would be seen in the equity valuation. According to the data, GTN is trading on the higher side of its peer group regarding the comparable metrics. GTN also seems to be trading on the cusp of a premium to their fair value according to the Enterprise Discounted Cash Flow Model.
Risks
GTN has many potential risks that can be expanded upon and read in their annual 10-K reports. This risk ranges from the uncertainty of the macro-environment, regulation & policy, operational, technology related, and based on whether the industry itself is in a declining market.
Moody's ranked GTN as a B1 which is a Non-Investment Grade rating that is considered speculative and subject to high credit risk.
The results of this analysis were based on historical assumptions, analyst estimates, and inputs derived from other relevant research. Investors should consider their own risk profiles and utilize a margin of safety when investing to help mitigate these speculative characteristics and variance from their own opinions.
This article was also researched utilizing certain parameters that should not be concluded as all-encompassing. The perspective provided is largely quantitative and investors should add breadth to their research before they invest.
Conclusion
GTN shows both positive and negative attributes for investors based off the analysis presented. The firm has an improving cash conversion cycle since 2020 supported by an improving days payable outstanding signifying that they have better terms with their creditors. The firm also has trends in decreasing liquidity, decreasing margins, and decreasing profitability which could mean that their increased leverage is not optimal and increases the risk for investors. GTN has only declared a dividend since 2020 so it does not present a strong appeal to income focused investors. The football field analysis shows that they are trading within their fair valuation range for equity though they are trading on the higher side for enterprise valuation in respect to the discussed peer group. They also have a non-investment grade credit rating and are in an industry that is very competitive and disrupted continuously. An argument could be made for the Hold-Sell rating range depending on the portfolios and strategies of individual investors.
Compare GTN to NXST with a parallel and deeper analysis to highlight the difference between peer group companies.
For further details see:
Gray Television: Trending Towards Poor Returns And Excess Risk