Summary
- Nexstar strengthening its liquidity and capital structure ratios is a good strategic move.
- A Dupont analysis showcases a better trend of profitability for potential investors.
- A weakening cash conversion cycle raises concerns about their time to turn sales into cash.
- The stock is trading around fair value based on a select peer group.
- Industry risks and a softer credit rating should weigh heavily into investing decisions.
Thesis
Nexstar Media Group, Inc (NXST) shows recent positive trends, though there are negative aspects to be considered heavily. The strengthening of ratios regarding liquidity and capital structure are strong strategic moves for the firm moving forward. Their increasing profitability metrics, cash flow, and dividend can also be convincing points for investors. They do possess several risks like a contraction in some of their margins, a decreasing ability to turn sales into cash, the non-investment grade credit rating, and the competitive dynamics of their Industry. Overall, they trade at a fair value range in comparison to a select peer group and an argument could be made for a Hold-Buy rating depending on the risk aversion of an investor.
Business Profile - Snapshot of Business Information
NXST is a diversified media company with a wide variety of assets in the Media & Publishing Industry within the Communication Services Sector operating in the United States as of 2001. They have an Enterprise value of approximately $14 billion and a Market Capitalization of approximately $7.5 billion. They trade with a historical beta of 1.49 meaning that they usually face more volatility than the overall market.
Business Profile (Author)
Ratios - Providing Context to Recent Trends
When analyzing NXST, utilizing ratio analysis can provide powerful insights into their recent performance.
Liquidity Ratios
NXST has showcased an improvement in their liquidity ratios.
NXST has managed to increase their current ratio and cash ratio which signify a movement towards a safer balance sheet and the 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 which helps build confidence for investors.
Liquidity Ratios (Author)
Capital Structure Ratios
The capital structure ratios of NXST also show a trend towards a more conservative balance sheet as they decrease their debt/assets and debt/equity ratios by reducing debt more than assets.
NXST also decrease their equity multiplier which was caused by a simultaneous decrease in assets and an increase in equity. These ratios will affect the profitability of the different shareholders and the tax burden of to company as determined by their capital structure. What this could signify is that NXST is decreasing their leverage which could decrease their insolvency risk though it could also result in decreased profitability for shareholders if not optimized appropriately.
Capital Structure (Author)
Efficiency Ratios
The efficiency ratios show a diverging efficiency trend signifying longer time to turn sales into cash and contrarily a positive trend of the usage of their assets to produce sales.
The efficiency ratios show a consistent Days Sales Outstanding ratio and a shortening Days Payable Outstanding ratio. This means that NXST is paying their bills faster while receiving payments on an equivalent timeframe. Theoretically, the Cash Conversion Cycle (Days Sales Outstanding - Days Payable Outstanding) increased 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 more days to produce cash between 2020 and the LTM which can be perceived as a negative trend. However, the firm shows an increasing Fixed Asset Turnover and Total Asset Turnover which is a result of their increasing proportion of sales to Net Fixed Assets and Total Assets. This is a positive trend for investors and typically results in better profitability (all else remaining equal).
Efficiency Ratios (Author)
Profitability Ratios
The net margin improved while all others slightly contracted, ultimately positively effecting return metrics.
The profitability ratios of the company show decreasing margins across the board except at the Net Margin level, which increased from 18% to 20.8%. Investors don't like to see decreasing margins but fortunately the net margin increase shows that NXST performed in favorable ways for their investors. The Return on Assets ((ROA)) and Return on Equity ((ROE)) both also showed a recent increase which is a good signal for investors.
Profitability Ratios (Author)
Dividend
The dividend has been increasing over the recent reported periods with a relatively small payout ratio. NXST has also issued a dividend for the past 9 years at a large growth rate which is a positive trend for dividend focused investors.
Dividend (Author)
Dupont Equation
ROE is increasing due to an improved total asset turnover ratio and net margin in-spite of a decreasing equity multiplier (decreasing leverage).
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 NXST 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 increased while the equity multiplier decreased. This combined with an increase in total asset turnover reveals an increasing ROE through less debt, better operational efficiency, and asset use which is a good sign for shareholders.
Dupont Equation (Author)
Discounted Cash Flow
Utilizing a Discounted Cash Flow Model for NXST 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 $250 and $343. 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 NXST.
Dividend Discount Model
Utilizing a Dividend Discount Flow Model for NXST allows investors to take a set of assumptions and determine an intrinsic value range for the firm based on the dividend return in the future. Utilizing analyst assumptions for dividend expectations and the derived WACC ranges as sourced from Finbox produces an implied intrinsic value for NXST between $46 and $56. This range is well under the current price action of NXST largely due to the small payout ratios of the firm and large WACC (discount rate) spread. If NXST were to increase their payout ratio then this model would likely become more relevant.
Comparable Company Analysis
Finding comparable companies and performing a Comparable Company Analysis allows investors to compare NXST to other similar firms in their industry/sector. The companies incorporated into this analysis are Gray Television Network ( GTN ), Tegna ( TGNA ), Sinclair Broadcast Group ( SBGI ), and The E.W. Scripps Company ( SSP ).
NXST trades around the average to slightly discounted based on equity multiples.
Analyzing the equity values of the group as a whole helps portray valuable insights into the multiples at which NXST trades. NXST is the largest company by market capitalization and currently trades at a LTM P/E ratio below the group mean (7.8 vs. 8). Forecasting into the Next Fiscal Year ((NFY) and above (NFY + 1)) shows that the analyst predictions move to a substantially lower P/E ratio compared to their industry though they increase from a P/E of 7.8 to 12.1 vs the industry 20.9. NXST also trades at a current fair valuation in respect to their P/FCF with a value of 5.9 vs the industry 5.6.
NXST 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 NXST trades. NXST trades at the highest LTM EV/Sales multiple (2.87x vs. 2.14x average) and also higher in the forecasted values compared to the peer group analyzed. They trade much closer to the average in the past and predicted EV/EBITDA and EV/EBIT ratios while also maintaining the best LTM EBITDA margins (38.13%).
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, NXST is trading at approximately its fair value based on its 52-week trading range and analyst 12-month targets. Using the comparable metrics discussed prior, NXST is trading around a fair valuation in comparison to the peer group represented above. According to the Dividend Discount Model, NXST is severely overvalued while contrarily undervalued according to the Discounted Cash Flow Model. The equity valuation metrics showcase that NXST is trading around it's appropriate fair value and a hold-buy rating could be reasonably supported largely due to the DCF results.
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, NXST is trading on the higher side of its EV/Sales and around the mean of its peer group regarding the other comparable metrics. However, NXST seems to be trading well under their fair value according to the Discounted Cash Flow Model. The enterprise valuation metrics showcase that NXST is trading around it's appropriate fair value and a hold rating could be reasonably recommended largely due to the range of results.
Risks
NXST 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 NXST as a Ba3 which is a Non-Investment Grade rating signifying speculative elements and substantial credit risk.
The results of this analysis were based on historical assumptions, analyst estimates, and inputs derived from other relevant research. Different 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.
Conclusion
NXST shows both positive and negative attributes for investors based off the analysis presented. They are positioning for better liquidity and a stronger balance sheet based on recent historical trends. Their net income also improved along with a better ROE and ROA. They also have a nine year history of dividends, a healthy payout ratio, and strong dividend growth rates. They are also strong producers of cash flow and the DCF analysis shows they are trading below their fair value. However, they show a contraction on their other margins and a decreasing ability to turn sales into cash. They trade at a fair value range in comparison to the discussed peer group signifying a lack of outperformance opportunities. 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-Buy rating range depending on the portfolios and strategies of individual investors.
For further details see:
Nexstar Is A Hold For More Risk-Averse Investors