2024-01-11 06:01:00 ET
Summary
- Gray Television is a leading owner of local television stations in the US, with a diverse market presence and strong revenue growth.
- The company faces significant headwinds due to large debt maturities in the coming years, leading me to assign a Hold rating.
- I place the intrinsic value per share at $10.30.
Executive Summary
Gray Television ( GTN ) stock is currently undervalued in my opinion. Based on my analysis, GTN is currently trading at a 15% discount to my price target of $10.30. While this, coupled with the recent selloff, presents a good opportunity to take exposure into the stock, the company faces headwinds over our forecast period with large notes (of $700 million and $800 million) due in 2026 and 2027 respectively as well as large-term loans due in 2024 and 2026 ($295 million and $1,190 million respectively). I therefore assign a Hold rating to GTN.
Company Overview
Gray Television, headquartered in Atlanta, Georgia, is a diversified media company and the preeminent owner of top-rated local television stations and digital assets across the United States. The company's formidable network of television stations extends its reach into 113 television markets, capturing approximately 36% of U.S. television households. Within this expansive coverage, Gray Television boasts leadership positions in 79 markets with the top-rated television station and commands the first or second highest-rated station in 101 markets. Its impressive portfolio is further enriched by ownership of video program companies such as Raycom Sports, Tupelo Media Group, PowerNation Studios, and state-of-the-art studio production facilities like Assembly Atlanta and Third Rail Studios.
The core of Gray Television's revenue generation is dual-faceted, driven predominantly by broadcast and internet advertising and retransmission consent fees . The company's financial trajectory has been marked by notable growth, with total revenue climbing to $3.7 billion in 2022 from $2.4 billion in both 2020 and 2021. Central to Gray Television's sustained market performance is its commitment to delivering robust local news and information programming. This strategic focus on local content has not only bolstered its market position but also enabled the company to maintain more consistent revenues relative to its industry counterparts.
Gray Television's diverse market presence and network affiliations further underscore its resilience. In 2022, the Phoenix, Arizona market was the largest revenue contributor, accounting for 5% of total revenue. This demonstrates a diversification where the top 10 markets collectively contributed approximately 26% of the total revenue in 2022, showcasing a balanced revenue distribution across its operations. The company's revenue by network affiliation reveals a spread across the "Big Four" networks, with CBS-affiliated channels generating around 39% of total revenue, NBC at about 26%, Fox Corporation (FOX) at 14%, and ABC at 11% in 2022.
In each market, Gray Television operates at least one station broadcasting a primary channel affiliated with one of the Big Four networks, with additional stations in some markets that also broadcast primary channels affiliated with these networks. The company's extensive broadcast network is complemented by numerous secondary digital channels, either affiliated with various networks or operating independently. The strategic network affiliation agreements governing these relationships grant the stations rights to broadcast a full spectrum of programs from the affiliated networks, with current agreements in place through December 2025.
Recent Financial Performance
In the third quarter of 2023, Gray Television, under the leadership of Chairman and CEO Hilton Howell, announced (from management's perspective), strong results , reinforcing the company's optimistic outlook for the year.
Throughout the call, management highlighted significant year-over-year growth in core and retransmission revenues, along with a substantial increase in political advertising revenues. This positive trend, expected to continue into the fourth quarter, has led to an upward revision in the full-year political advertising revenue forecast to $80 million. A notable highlight was the completion of the Assembly Studios project with NBCUniversal, poised to generate future lease revenues. Operational successes were evident in Gray's Television Stations, with record-breaking digital engagement and expansion in connected TV and next-gen broadcasting technologies. Stability and growth in the advertising environment, particularly in the automobile and home improvement sectors, coupled with a strong political advertising presence, further bolstered the company's financial outlook.
Chief Legal & Development Officer Kevin Latek underscored the growth in retransmission revenue and the strategic alignment of broadcast programming with network affiliations, spotlighting shifts towards premium content in the broadcasting industry. These results are no doubt impressive, but unfortunately are underscored by the fact that the company is expected to post negative earnings for Q4 (and the fiscal year):
GTN Expected Earnings (Yahoo Finance)
Industry Overview
Value Voyage Industry Attractiveness Matrix (Author's Calculations)
As I analyze the U.S. TV broadcasting industry in 2024, it's evident that the sector is confronting significant headwinds, with long-term challenges that could impact its expansion and sustainability. According to EY , The industry's ability to adapt and evolve in the face of these challenges is crucial for its future trajectory.
The reconfiguration of carriage agreements signifies a fundamental shift in the industry. Media companies are attempting to extend the profitability of traditional linear broadcast and cable networks while simultaneously capitalizing on the burgeoning demand for streaming platforms. This duality reflects a consumer-driven transformation, as viewers increasingly opt for content tailored to their preferences, often at a lower cost than traditional pay TV bundles. While network owners are adapting by maintaining linear distribution for popular channels and rationalizing their network portfolios, this change underscores a deeper trend of viewers moving away from traditional television consumption models. The growing frustration of distribution companies with rising rates demanded by linear network owners, coupled with the availability of similar content on streaming services, is accelerating this shift.
The anticipated wave of mergers and acquisitions in the media sector is both a response to and a catalyst for industry transformation. The drive to consolidate is fueled by the need to amass content, scale direct-to-consumer services, and improve competitive positioning. However, this consolidation faces significant hurdles, including regulatory challenges and the diminished value of low-performing cable networks. These factors suggest a potentially tumultuous path ahead, with strategic repositioning and asset divestitures becoming necessary for survival and growth in a highly competitive landscape.
The rise of artificial intelligence in the media industry presents both opportunities and challenges. AI's potential to enhance productivity and drive growth is counterbalanced by concerns about job security in traditional creative roles and the protection of intellectual property. The integration of AI in content creation and distribution is a double-edged sword, offering transformative capabilities but also raising ethical and operational questions. The industry must navigate these challenges carefully to harness the benefits of AI without undermining its core creative and operational principles.
The recovery of the box office highlights a consumer preference for quality, original storytelling, and in-person entertainment experiences. However, the industry's reliance on long-running franchises and a lighter release slate than historical averages point to potential vulnerabilities. The slow recovery pace, still lagging behind pre-COVID-19 levels, indicates an industry grappling with changing consumer behaviors and preferences. This trend requires a strategic rethinking of content offerings and distribution models to align with evolving audience expectations.
Finally, the rising cost of living is reshaping consumer spending on media and entertainment. The industry must innovate in its offerings, exploring creative packages and dynamic pricing to maintain consumer engagement. The discretionary nature of entertainment spending, particularly in an environment of economic uncertainty, poses a significant challenge. Companies must demonstrate the value of their offerings in a market where consumers have myriad choices and limited discretionary income.
To conclude, it is my view that the U.S. TV broadcasting industry in 2024 faces an array of headwinds. These challenges, ranging from technological disruption and changing consumer preferences to economic pressures and regulatory hurdles, suggest a period of potential decline and restructuring. For the industry to thrive, it must embrace innovation, adapt to the evolving landscape, and strategically navigate the headwinds that threaten its traditional business models
Intrinsic Valuation Analysis
I conducted a discounted cash flow analysis and anchored my expectations (but not matched) of Revenue and other key line items to the Median broker estimate (via FactSet).
Gray Television's revenue projections exhibit a trajectory of growth with fluctuations that are characteristic of the industry's cycle, particularly due to the impact of political advertising revenues. Revenues are estimated to be $3,492 million in 2023, with a notable increase to $3,911 million in 2024. A slight dip is anticipated in 2025 to $3,411 million, reflecting a post-election year adjustment, which is then followed by a recovery in 2026 to $3,922 million and stabilizing at $3,726 million in 2027.
This results in a target price for GTN of $10.30 ($10.39), derived from applying a 7x EBITDA multiple. This multiple was chosen via a discount on the current industry median of 8.6x, reflecting my forecast of multiple compression based on the industry headwinds above. This multiple encompasses broader industry trends, including the shift towards digital consumption and the strategic adaptations necessitated by technological advancements and consumer preferences.
GTN Sensitivity Tables (Author's Calculations)
My price target, however, is slightly lower than most analyst estimates, with most estimates anchored at $12 a share:
Debt Overhang
I would understand if by this point you are asking yourself why I am not issuing a buy rating. However, something of note with my DCF valuation is that I did not incorporate expiring debt maturities in 2026 and 2027 (something that is not incorporated in any DCF for a multitude of reasons, but mainly that management has extensive flexibility within the Financing Activities section) of $700 million and $800 million respectively or the term loan maturities due in 2024 and 2026 ($295 million and $1,190 million respectively):
GTN Debt Obligations Due (GTN 10-K 2022 Note 4)
As a result, and even assuming no payments of dividends, of which the current yield is around 3%, our cash flow analysis shows that GTN will have a significant cash shortfall (represented by the increase in Revolver in each of these years):
GTN Cash Flow Projections (Author's Calculations)
To be clear, this doesn't mean that GTN faces the risk of bankruptcy or even insolvency, but instead that management will have to do something to rectify this; likely either having to sell assets, issue more equity, or a combination of both. Because of this, I do not see GTN as a sustainable long-term investment, even though there is upside to this investment in the short term.
Risks to Thesis
Gray Television faces significant risks that could lead to a downward revision in my thesis. A prominent risk is the rapid evolution of the industry and changing consumer behaviors, where the proliferation of streaming services and the trend of cord-cutting directly threaten traditional revenue models. This landscape requires Gray Television to continually adapt, investing in digital platforms and innovative content delivery methods to maintain audience engagement and advertising revenue streams.
Another substantial risk is rooted in the economic sensitivity of the advertising market. As a company heavily reliant on advertising revenues, Gray Television's financial performance is vulnerable to economic downturns, which typically lead to reduced advertising spend. This risk is amplified by the cyclical nature of political advertising revenues, introducing volatility and unpredictability into the company's revenue streams, which can swing significantly based on the political calendar.
Finally, the company's reliance on network affiliations underscores a critical vulnerability. These affiliations, particularly with the Big Four networks, are foundational to Gray Television's content distribution and revenue generation. Any unfavorable changes in these relationships, whether through negotiation outcomes or shifts in network strategies, could materially impact the company's ability to attract viewers and generate revenue, thereby affecting its competitive standing in the marketplace.
Long term, these risks may be insurmountable, referring back to our thesis of this being a short-to-medium-term idea with high mean reversion potential.
Conclusion
In conclusion, I recognize the company as a possible attractive short to medium-term opportunity, thanks to its projected financial performance and intrinsic upside. For investors with a long-term outlook, however, this does not represent an attractive opportunity. While my intrinsic model does show upside, I issue a Hold rating as this represents only a short-term, mean reversion-style investment. With large debt maturities coming due within the coming years and a likely need to raise capital, I believe there are better opportunities elsewhere.
For further details see:
Gray Television: Undervalued But Faces Significant Debt Overhang And Industry Headwinds