2023-08-12 04:20:25 ET
Summary
- TEGNA reported revenue of $731.5 million, down 6.8% compared to $784.8 million in Q2 FY22. This decrease was fueled by significant reduction in political revenues as per the election cycle.
- The company can maintain its quarterly dividend of $0.11375 in the last quarter as well which can make the annual dividend $0.4175, representing a dividend yield of 2.45%.
- After comparing the forward P/E ratio of 7.87x with the sector median of 14.56x, I think the stock is currently undervalued.
Investment Thesis
TEGNA (TGNA) operates in the media industry and manages radio & television stations to provide digital content to its customers. The company has delivered mixed Q2FY23 results and managed to beat the market expected EPS in the second quarter despite the macroeconomic headwinds. It has also increased its dividend payout in the second quarter, which makes it an appealing investment option to hold in the portfolio to mitigate the recessionary risks.
About TGNA
TGNA is an American media company that manages radio and television stations to provide digital content to its customers across various platforms. The business comprises sixty-four television stations covering 51 states in the U.S. markets. It operates television stations that also have a strong presence across mobile, online, and other social platforms. The company also owns and manages two radio stations in Columbus, Ohio as well as the prominent multicast networks Quest, Twist, and True Crime Network. The company generates its revenue primarily through four sources: subscriptions, advertising & marketing services, political advertising, and other services. The subscription revenues mainly include fees paid by cable, satellite, and OTT. This source generates 46.7% of the company’s total revenue. The advertising & marketing revenues are mainly derived from digital marketing services, non-political television advertising, and advertising on OTT apps, websites, tablets, stations, and other mobile products. The advertising & marketing revenue comprises 41.6% of the company’s total revenue. Political advertising revenues are generated in even-year election cycles, including both local and national advertising. This source earns 10.4% of the company’s total revenue. The company also generates revenues from other sources such as tower rentals, production of programming, and distribution of its local news content. All these other sources generate 1.3% of the company’s total revenue.
Financials
The company recently delivered mixed quarterly results . It reported revenue of $731.5 million, down 6.8% compared to $784.8 million in Q2FY22. This decrease was mainly fueled by a significant reduction in political revenues as per the election cycle. The AMS revenues also declined compared to the previous year. The company missed the market revenue expectation by $1.39 million or 0.19%. Adjusted EBITDA stood at $194.23 million. TGNA reported a net income of $200.10 million, which is an increase of 51.7% growth compared to $131.9 million in last year’s same period. This increased net income is driven by the decreased operating expenses, which shows the rising efficiency of the business. The increased net income resulted in diluted EPS of $0.92 in Q2FY23. The company has managed to beat the market’s EPS consensus by $0.02 per share, or 4.8%. TGNA reported $489 million in liquidity and free cash flows stood at $112 million.
The company has performed well, however the results were slightly affected by the political election cycles and recessionary pressures in the U.S. It has provided an outlook for the third quarter and FY2023. TGNA expects revenue to decline by double-digit percentage and operating expenses to decrease by a single-digit percentage. I think the company’s estimates are correct, as the cyclical even-to-odd nature of political revenues might reduce $93 million in revenues. For the full-year 2023, the net leverage ratio is expected to be below 3x, and capital expenditures between the range of $55-$60 million.
According to Seeking Alpha, TGNA’s estimated revenue for FY2023 might be $2.95 billion, which is a 10% decline compared to $3.28 billion in FY2022. I believe the revenue estimate of Seeking Alpha perfectly captures rebounded growth in automotive sector and the company's guidance. The company’s 5-year average net income margin is 16.49%. After considering the rising efficiency of the company and its FY2023 guidance, I think TGNA can sustain the net income margin of 16.49% which gives the net income of $486.36 million or EPS of $2.17.
Dividend Yield
The advertising & media industry has been experiencing constant growth and changes in the past few years as digital marketing services are introduced in the market due to the growing use of various social media platforms. However, as this industry highly depends on the country’s macroeconomic conditions, it saw a slight downturn due to the recessionary pressures in the USA. Despite these negative scenarios, the company’s strong customer base and its diversified geographical presence have significantly helped it to deliver a decent performance in the current year. I believe the company has ample growth opportunities in the future as the automotive sector, which is one of the largest sources of advertising & marketing revenues is rebounding at a faster pace. It is observed that this sector has delivered strong growth for the fourth consecutive quarter. As per my analysis, even the growth of its OTT platforms can also help it in increasing its profit margins as the trends are more inclined toward internet platforms compared to traditional platforms. The company’s revenues are diversified and predictable to some extent which has benefited it to maintain a stable cash flow. I believe as the company grows, it can also increase its distributions as a result of its healthy cash flows. It has a remarkable history of dividend payouts which indicates its healthy market position. TGNA has paid a dividend for consecutive 33 years which shows consistency and provides assurance of future dividend payments. In FY2022, the company paid a cash dividend of $0.095 in all quarters. This dividend payout totaled $0.38 per share annually resulting in a dividend yield of 2.23% compared to current share price. Despite comparatively mixed performance in FY2023, it paid a $0.095 per share dividend in the first two quarters. The management decided to increase the dividend by 19% in the third quarter and paid $0.11375. TGNA’s dividend experienced 63% growth since March 2021. Given the company's strong cash positions and growth prospects, I believe it can maintain its quarterly dividend of $0.11375 in the last quarter as well which can make the annual dividend $0.4175, representing a dividend yield of 2.44% compared to current share price. The company’s forward dividend yield of 2.44% is 32% higher than its 5-year average forward dividend yield of 2.02%. This appealing dividend yield makes the firm an attractive stock to hold in the portfolio to mitigate the recessionary impacts.
What is the Main Risk Faced by TGNA?
The demand for advertising is highly exposed to the risk of cyclicity and keeps fluctuating from time to time. It is also influenced by various regional and national economic factors. It is observed that demand also changes as per the election cycles in the country. Due to all these reasons, the company’s operating results can fluctuate depending on the effect on revenues due to macroeconomic conditions. If the macroeconomic scenarios in the U.S. deteriorate, it can negatively impact the company’s profit margins due to less demand in the industry.
Valuation
Revenues were comparatively low in this quarter due to the even-odd election cycle, however there was an increase in the subscription revenues on a sequential basis. I believe, it further has the potential to grow its revenues and increase its profit margins as a result of the healthy recovery of the automotive vertical. According to seeking alpha, TGNA’s estimated revenue for FY2023 might be $2.95 billion, which is a 10% decline compared to $3.28 billion in FY2022. The company’s 5-year average net income margin is 16.49%. After considering the rising efficiency of the company and its FY2023 guidance, I think TGNA can sustain the net income margin of 16.49% which gives the net income of $486.36 or EPS of $2.17.
After considering Q2FY23 results and increasing efficiency of TGNA, I am estimating EPS of $2.17 for FY2023, which gives the forward P/E ratio of 7.87x. After comparing the forward P/E ratio of 7.87x with the sector median of 14.56x, I think the stock is currently undervalued. I believe the company might gain momentum in the coming quarters as a result of its recent positive trends in the automotive vertical and increasing operating efficiency. This gained momentum can help TGNA to trade at its sector median P/E ratio. Therefore, I estimate the company might trade at a P/E ratio of 14.56x in FY2023, giving the target price of $31.6, which is a 85.1% upside compared to the current share price of $17.07.
Conclusion
TGNA’s solid presence in key markets and diversified customer base helped it to reduce the impacts of macroeconomic headwinds and deliver strong financial results. It is exposed to the risk of cyclicity, which can contract its profit margins. It has recently increased its quarterly dividend payout by 19% which reflects its healthy positioning. I believe it can further increase its dividend payout in the coming years as a result of its positive growth aspects and healthy cash flows. The stock is undervalued, and we can expect a healthy 45.5% growth from the current price levels as a result of healthy performance in the automotive verticals. After considering all the above factors, I assign a buy rating to TGNA.
For further details see:
TEGNA: Despite Mixed Results, The Stock Is Undervalued