2023-05-11 02:21:20 ET
Summary
- Nexstar Media Group has seen a strong rebound in Distribution revenue, helping to offset the decline in Television Advertising revenue.
- The stock looks to be trading at good value on a P/E basis.
- I take a bullish view of Nexstar Media Group.
Investment Thesis
I take a bullish view on Nexstar Media Group due to a strong rebound in Distribution revenue as well as an attractive P/E ratio.
In a previous article back in March, I made the argument that Nexstar Media Group ( NXST ) could see some pressure on revenue growth going forward, and investors would likely want to see more evidence of a rebound in revenue before we see meaningful upside in the stock.
Since March, the stock has virtually remained at the same level - up slightly by 0.46%.
The purpose of this article is to assess whether we could expect meaningful upside going forward, particularly taking recent financial results into consideration.
Performance
When looking at the company's Q1 2023 Earnings Release, we can see that while Television Advertising revenue saw a decline of 6% (with Political Advertising revenue down significantly with the ending of the U.S. midterms in November 2022 and 2023 generally being quieter from an election standpoint), Distribution Revenue saw significant growth of 9% from that of last year.
Nexstar Media Group: Q1 2023 Earnings Release
I had previously cautioned that given Distribution revenue has accounted for the largest share of revenue overall - it was imperative that this segment sees a recovery for further upside in the stock to continue.
In this regard, growth of 9% as compared to the previous year has been welcoming - with renewal of distribution agreements in 2022 on better terms for the company having accelerated revenue. We had previously saw a lag in growth across this segment due to negotiations with multichannel video programming distributors for the renewal of distribution agreements having temporarily resulted in removal of Nexstar from certain MVPDs while this was taking place.
However, distribution revenue growth remains important for Nexstar's business, as it helps to offset the inevitable decline in Political Advertising revenue during periods of low election activity as well as having offset a decline in Core Advertising for this quarter.
To put Nexstar Media Group's Distribution revenue performance into a wider context, I decided to generate a heatmap of revenue across this segment from Q1 2019 to the present:
Figures sourced from historical Nexstar Media Group quarterly reports (Q1 2020 to the present). Heatmap generated by author using Python's seaborn library.
We can see that for the past three years - distribution revenue has been highest in Q1 - which may coincide with the renewing of distribution contracts with MVPDs. As such, while distribution revenue might come down slightly in upcoming quarters - I take the view that overall net revenue can still see growth for as long as we continue to see improvement on that of the same quarter for the previous year.
However, I am cautiously optimistic that distribution revenue can continue to rise in the short to medium-term and the company can further reduce its exposure to a decline in television advertising revenue. Specifically, S&P Global (SPGI) reported in June 2022 that a stall in auto ad sales were a significant factor behind the decline in ad revenue more generally. However, the report had stated at the time that Nexstar was in a leading position at the time to purchase The CW and was eyeing possibilities to increase its stake in TV Food Network.
Fast-forward to the present, and Nexstar has increased its interest in TV Food Network by 17.1% to $226 million, while the company ultimately acquired the CW Network in October 2022 which allowed the company to offset a decline in revenue across political and Olympic advertising. Given that Nexstar also expects to continue to benefit from renewals of distribution contracts in 2023 and now owns a wider portfolio for distribution - this can help to further offset the downward pressure we have been seeing in television advertising.
Risks and Looking Forward
Going forward, I take the view that the growth in distribution revenue that we have been seeing has the potential to continue given that further distribution contracts are up for renewal this year and the company can now benefit from a larger stake in the TV Food Network and acquisition of the CW.
From an earnings standpoint, we can see that the company's P/E ratio has remained steady since 2021 while normalized diluted EPS has seen strong growth over the past two years:
ycharts.com
Given that earnings growth has consistently been keeping up with that of price, I take the view that Nexstar Media Group is trading at good value on this basis and a rebound to the prior high of $220 that we saw near the beginning of this year is quite plausible.
The main risk that I would see for Nexstar at this time is a continued fall in Television Advertising revenue potentially outweighing gains from Distribution. Given inflationary pressures and recessionary concerns - advertising budgets are also coming under pressure and this is being reflected in lower television advertising. With that being said, I expect that such advertising should see a strong recovery heading into 2024, as the U.S. Presidential Elections start to approach. Additionally, growth in Distribution revenue has offset the decline in Television Advertising so far, and I am optimistic that this trend can continue.
Conclusion
To conclude, Nexstar Media Group has continued to see strong growth in Distribution revenue despite a fall in Television Advertising revenue. Additionally, the company's earnings trajectory indicates that Nexstar is trading at good value on a P/E basis. From this standpoint, I take a bullish view on Nexstar Media Group.
For further details see:
Nexstar Media Group: Rebound In Distribution Revenue Growth Encouraging