Summary
- NXST has used its position as one of the largest local television broadcasters to rebuild the company and capitalize on the shift in the media landscape.
- The company increased its dividend by 50% in January, and if management can continue to grow NewsNation and stem losses at The CW, we believe that the dividend goes higher.
- Even with $7 billion+ in debt, the company has plenty of maneuverability and only a small headache with the floating rate debt that is unhedged.
Over the last few years we have traded in and out of media names based on where we saw attractive valuations or special situations. In most cases we utilized companies that were mostly pure plays in what they did, however today we want to highlight a name that we think might position investors to benefit from the strong cash flows of the local broadcasting business while having exposure to plays that might very well play a key role in bridging the gap to the future of television - on both a local and national level.
Legacy Assets Paving The Way To The Future
Nexstar Media Group ( NXST ) has been slowly transitioning their business over the last few years by either picking up assets on the cheap, or developing new concepts in house on logical budgets, to piece together what might be the future of the company. Everyone knows about Nexstar's great local broadcast assets, however Nexstar has made moves that could turn out to be shrewd transactions down the road. While some long-term investors may be familiar with Antenna TV and Rewind TV, we think that Nexstar's purchase of The CW from Warner Bros. Discovery ( WBD ) and Paramount Global ( PARA ) might ultimately prove to be good for both The CW (as it gets more attention from an interested parent organization) and Nexstar as it gains an asset that can help it reach its national aspirations. Note: Nexstar purchased 75% of the network and Warner Bros. Discovery and Paramount Global each retained a 12.5% ownership stake.
The CW will be an asset that takes time to play out, as we believe that management will have to do a rework of the network to optimize revenues and profits moving forward. The good news is that the company has assets that we believe to be complimentary and should help hasten the overhaul. We think that the company could utilize some on-air talent from their OTT and cable properties, as well as studios and sets to drive synergies and keep costs low. We are not sure that The CW will be profitable in 2025 as management states is the goal, but we do like that Nexstar sold some real estate to cover the expected losses moving forward in order to not impact their plans to return capital to shareholders.
While The CW is an asset that we believe could generate significant returns for shareholders over time, it is our opinion that NewsNation is currently the company's best positioned asset to help drive shareholder returns in the near-term. It has been profitable since launch and Nexstar has a plan to transition to 24/5 news in 2023 and 24/7 news by the end of 2024; which is key because of the national elections taking place in 2024. NewsNation is positioned as a nonpartisan network and is focused on delivering news to serve those who identify as independents. A number of recent hires would appear to skew left, however management is focused on wanting to deliver actual news and differentiate themselves by not displaying a bias. Note: Many of these high-profile hires have also helped boost audience and ratings growth.
NewsNation is still not in all of Nexstar's media markets, however we believe that management will continue to have success in getting MVPDs to pick up the channel as they renegotiate their local broadcast contracts moving forward. The MVPDs definitely need Nexstar's broadcast product, so a new news channel at the right price can be seen as the cost of doing business.
Further down the road, Nexstar might also reap significant rewards from ATSC 3.0 but most of those returns would be back loaded near the end of this decade.
Cash Flow And Balance Sheet
Unless Nexstar's adjusted FCF moves dramatically higher in 2023, we suspect that management's allocation of FCF will remain relatively unchanged from 2022 - aside from the large dividend increase announced in January. With $140 million+ due for required debt repayment in 2023, we think management might pay down a total of $300 million so long as the business remains strong and they are able to maintain leverage ratios around current levels.
We suspect that debt repayment, as a percentage of FCF, will dip in 2023 as there are minimal maturities and management wants to focus on driving shareholder returns. (Nexstar 2023 Investor Presentation)
So long as interest rates do not continue their march higher, we believe that Nexstar will have the ability to continue to repurchase shares. In fact, in last quarter's 10-Q Subsequent Events section we noticed this:
Nexstar repurchased at least another $100 million in common stock in Q4 and it is important to note that the company can continue to do this because the acquisition of The CW and the losses it will generate will be offset by the $200 million+ in gross cash proceeds from the sale of real estate. (Nexstar Q3 2022 10-Q)
We expect Nexstar to have repurchased more than $100 million in shares under their share repurchase plan in the fourth quarter, and to stick to a comparable amount (in $ terms) for FY 2023.
What To Watch With Quarterly Results Upcoming
The company announced in January that they would be increasing their dividend by 50% , from $0.90/share to $1.35/share per quarter. The yield is below 3%, but the company does have the ability to continue raising it in future years. While this was great news and made the stock even more compelling when compared to peers on the national and local side, we will be paying attention to what management has to say about their capital allocation priorities and how they are specifically allocating FCF moving forward. Dividends have made up a small portion of this allocation, but with the increase we are interested to see if management is going to slow share repurchases or possibly debt repayment. This could very well be a mute point if advertising dollars continue to roll in for 2023, in which case management could charge ahead.
We hope that management continues to pay down debt, not because the leverage is troubling at 3.2x, but because Nexstar has just over 60% of its debt as floating rate with no hedges in place. While there are no major maturities (just required payments on the loans) over the next few years, 2026 and 2027 will have to be addressed as there are large maturities which also happen to be across different debt types (loans and bonds).
With the company reporting their Q4 and FY 2022 results on February 28th , we think that management should be able to provide pretty accurate details on the company's transition of NewsNation to 24/5 news programming in Q2 of 2023 (with two-thirds of Q1 complete, one would assume that if there were any problems with the transition, then the company would be aware of them by the time they host the conference call).
Final Thoughts
Nexstar is an intriguing play among the local television broadcasters, and we think that their stock price says it all. The market likes the story and believes that management will execute on their plan. While the legacy business will continue to generate strong FCF for investors and service both the debt and share buybacks (and dividends as well!) we think that management has been wise to target organic growth opportunities that not only fit well within their core business (which enables fast deployment/ramp-up) but also present opportunities that have high margins and the ability to generate strong FCF.
As the company continues to pay down debt over the years and their new ventures, such as NewsNation, begin to bear significant rewards, we believe that Nexstar will be in a position to not only continue to engage in additional M&A, but ramp up dividends and share buybacks.
Even with the stock trading near highs, we are buyers of Nexstar for portfolios without current exposure to the name up to our desired portfolio weighting. We believe that current positions should be held as there is more value to be realized over the next 18-24 months as political ad money reappears.
For further details see:
Nexstar Media Group: Not Your Typical Local Television Play