Summary
- Two buy scenarios for short-term and/or long-term gains. Overall win for adaptable investors.
- Positive trends in the ratio analysis of TEGNA's financial statements shows a good value if the trajectory continues.
- Dividend history of 30 years is an added bonus for investor returns.
- Undervalued current pricing based on DCF analysis.
- Competitive price compared to their peer group.
Thesis - Buy
TEGNA Inc. ( TGNA ) shows positive trends and attributes for investors based off multiple quantitative parameters like ratio analysis, DCF analysis, and when compared to their peer group. They have a low beta indicating less correlation to the overall market
The firm trades overall around the discounted to fair value range in their peer group with a few higher equity multiples. They have a 30-year history of dividends and are in a deal that could close with short-term upside and/or long-term unilateral performance depending on how the investor positions themselves.
We are recommending TGNA stock as a buy at the current time with multiple positive outcome scenarios if positioned appropriately.
Business Profile - Snapshot Of Business Information
TGNA delivers television programming and digital content in the Media & Publishing Industry within the Communication Services Sector operating in the United States as of 1972. They have an Enterprise value of approximately $7.5 billion and a Market Capitalization of approximately $4.8 billion. They trade with a historical beta of 0.61 meaning that they portray substantially less volatility than the overall market which is a good signal for investors in the current environment.
Business Profile (Author)
Ratios - Providing Context To Recent Trends
When analyzing TGNA, utilizing ratio analysis can provide powerful insights into their recent performance.
Liquidity Ratios - On A Positive Trend
TGNA liquidity has substantially increased since 2020. Their short-term liquidity ratios signal a stronger balance sheet for investors.
Their cash holdings increased from around $41 million in 2020 to $377 million LTM. They have increased their current ratio from 1.59 to 2.71 and their cash ratio from a very low 0.1 to 0.95 which are all excellent signals to investors. It is important for the firm to mitigate liquidity risk moving into a more uncertain future macro-environment and TGNA has trended in a positive direction.
Liquidity Ratios (Author)
Capital Structure Ratios - Decreasing Leverage Trend Builds Some Confidence For Risk-Averse Investors
The capital structure ratios of TGNA show a less leveraged capital structure indicating a more conservative balance sheet. This could potentially hurt profitability since debt acts as a tax shield if not strategically optimized while it contrarily decreases risk to the firm.
Evaluating the capital structure of TGNA shows a decreasing amount of leverage across all the ratios. The debt/equity ratio has moved from 2.3 to 1.46 signifying a faster growth in equity and decreasing liabilities. The debt/assets ratio decreased from 0.7 to 0.59 from increasing assets and decreasing debt. The equity multiplier decreased from 3.3 to 2.46 meaning that the equity outgrew the assets of the firm. These ratios will affect the profitability of the different shareholders and the tax burden of the company as determined by their capital structure. What this could signify is that TGNA is decreasing their leverage which decreases their solvency risk though it could also result in decreased profitability for shareholders if it is not optimized appropriately.
Capital Structure (Author)
Efficiency Ratios - All Positive Signs For Investors
The efficiency ratios show large improvements in the firm's ability to turn sales into cash and though their ability to utilize assets for sales.
The efficiency ratios shows a decreasing days sales outstanding ratio and an increasing days payable outstanding ratio. This means that TGNA is paying their bills over a slightly longer timeframe while receiving payments on a relatively equivalent timeframe. Theoretically, the cash conversion cycle (days sales outstanding - days payable outstanding) decreased 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 less days to produce cash between 2020 and the LTM which is a positive trend.
The firm showed an increasing asset turnover and total asset turnover which is a result of their proportion of sales to net fixed assets and total assets. This is also a positive trend for investors and typically results in better profitability (all else remaining equal).
Efficiency Ratios (Author)
Profitability Ratios - Margin Collapse Is Concerning But Overall Strong Ratios
All of the margins (Gross, EBITDA, EBIT) contracted in some capacity since 2020 excluding their Net Margin. However, the return on assets ((ROA)) increased from 7.05% to 7.60% while the return on equity ((ROE)) dropped from 23.3% to 18.7%. This could signify that the de-leveraging referenced earlier may be less than optimal or that the business is struggling in respect to their costs ultimately resulting in some concerning outcome possibilities for investors. However the margins and ROE values overall are better in respect to their competitors.
Profitability Ratios (Author)
Dupont Equation - Deleveraging Hurts Profitability But Still A Strong ROE
ROE is decreasing due to a worsening equity multiplier though the relatively equivalent/slightly increased total asset turnover, and improved net profit margin attempt to maintain its competitiveness.
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 TGNA 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 a stagnant total asset turnover reveals a decreasing ROE through less leverage counteracted by better operational efficiency, and equivalent asset use which is a neutral sign for shareholders overall.
Dupont Analysis (Author)
Discounted Cash Flow - Trading Under Their DCF Range
Utilizing a Discounted Cash Flow DCF Model for TGNA 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 TGNA between $22.12 and $30.29. 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 TGNA.
Discounted Cash Flow Analysis (Author)
Dividend - Cherry On Top
TGNA has 33 years of dividend payments which are an added incentive for prospective shareholders of this firm. The dividend payout ratio is healthy and the three year dividend growth rate is over 10%.
Dividend Data (Author)
Comparable Company Analysis
Finding comparable companies and performing a Comparable Company Analysis allows investors to compare TGNA to other similar firms in their industry/sector. The companies incorporated into this analysis are Nexstar Media Group (NXST), Gray Television, Inc ( GTN ), Sinclair Broadcast Group ( SBGI ), and The E.W. Scripps Company ( SSP ).
TGNA trades around a slight premium based on most equity multiples though the future signifies potentially favorable ratios compared to their peer group.
Analyzing the equity values of the group as a whole helps portray valuable insights into the multiples at which TGNA trades. TGNA is one of the middle sized firms by market capitalization and currently trades at a LTM P/E of 8.95x which is slightly above the mean around 8x. Forecasting into the Next Fiscal Year ((NFY)) and above (NFY + 1) shows that the analyst predictions of TGNA move to a substantially lower P/E ratio of 16.7 compared to their industry (which increases as well) largely due to a significant EPS ((GAAP)) decline which is not ideal for investors considering that the price action may not play favorably if the industry needs correcting. TGNA does trade at a premium valuation in respect to their P/FCF with a value of 6.9x vs the industry 5.5x.
Comparable Company Analysis - Equity Valuation (Author)
TGNA trades around the fair value to slight premium range 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 TGNA trades. TGNA trades a slight premium LTM EV/Sales multiple (2.4x vs. 2.15x average) and also higher in the forecasted values compared to the peer group analyzed. They also trade average/above average in the past and predicted EV/EBITDA ratios, however their EV/EBIT ratios trade at a discount to the industry while showing a strong LTM EBITDA margin and Debt/EBITDA ratio when compared to their peer group.
Comparable Company Analysis - Enterprise Valuation (Author)
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, TGNA is trading within its fair value based on its 52-week trading range and under the analyst 12-month targets (based on an acquisition offering price). Using the comparable metrics discussed prior, TGNA is trading generally over their fair value in comparison to the peer group represented above. According to the Equity Discounted Cash Flow Model, TGNA is trading at a discount value. Summarily, according to the equity valuation metrics, TGNA is currently trading between their fair value and slight premium range.
Equity Valuation - Football Field (Author)
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, TGNA is trading within the discount to fair value range of its peer group regarding the comparable metrics. TGNA also seems to be trading at a discount to their fair value according to the Enterprise Discounted Cash Flow Model.
Enterprise Valuation - Football Field (Author)
Risks
TGNA 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.
The results of this analysis were based on historical assumptions, analyst estimates, and inputs derived from other relevant research. 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.
This article was also researched utilizing certain parameters that should not be concluded as all-encompassing. The perspective provided is largely quantitative and investors should add breadth to their research before they invest.
TGNA Is A Buy - Here Are Two Scenarios To Action
TGNA is in the unique situation of being acquired by Standard General at a value of $24 per share with a walk date in May of 2022. Based on the quantitative results of the analysis presented in this article, TGNA is a buy around their current stock price though the price action around the uncertainty of a deal could be detrimental short-term.
Here are our scenarios for how to trade TGNA:
Case 1
Buy the shares, collect the dividend, focus on the long-term play or a short-term win of 11% through the acquisition closing successfully. Tegna is currently trading at $21.68 as of this writing with a $0.095 dividend going ex-dividend on March 9th. This means your pre-tax cost basis is equal to $21.585 (21.68 - 0.095). With the deal closing at $24 means there is a potential 11% upside on date of payment. If the deal fails then the volatility of the stock will likely be negative but a long-term investor can hold for the long run knowing that TGNA is likely currently fairly-valued to under-valued as a standalone given the assumptions discussed prior.
Case 2
Utilizing a cash-secured put option would allow the writer of the put to collect a $40 premium (22DTE, $19 strike) or a $55 premium (22DTE, $20 strike). An investor willing to hold further out to a 57DTE could collect a $50 to $90 premium on a $20 strike. As an example, targeting the 22DTE and $20 strike would collect a 2.75% return on their collateral cash over 22 days which annualizes to a 45% return. If the price action drops to the strike or below due to a failed deal, then the put writer could get exercised on and have a lower cost basis (strike price - premium collected + fees/commissions) and become a long-term holder of the undervalued stock at their cost basis.
Overall, both cases offer short and/or long-term upside for investors given multiple scenarios.
Conclusion
TGNA shows positive trends and attributes for investors based off the analysis presented. The ratios show improvement in liquidity, efficiency, and a risk averse capital structure. The negative aspects include the contracting margins and slightly decreased ROE. The firms trades overall around the discounted to fair value range in their peer group with a few higher equity multiples. They have a 30 year history of dividends and are in a deal that could close with short-term upside and/or long-term unilateral performance depending on how the investor positions themselves. We are recommending TGNA as a buy at the current time with multiple positive outcome scenarios.
Compare TGNA to GTN with a parallel and deeper analysis to highlight the difference between peer group companies.
Compare TGNA to NXST with a parallel and deeper analysis to highlight the difference between peer group companies.
For further details see:
TEGNA: Positive Trends, 2 Buy Scenarios For Adaptable Investors