Nexstar Media Group, Inc. (NXST) – Prime Time for TV Broadcasting
Nexstar Media (NXST) is a network affiliate broadcaster that is trading at an attractive valuation of P/FCF of 5.3x or 19% FCF yield. The management at NXST are excellent capital allocators, returning the majority of FCF to shareholders. In the technological age of the internet, you might think that broadcast television is no longer relevant. And like the newspaper industry, you might think that revenues for broadcasters would be in the perpetual decline. Luckily, you are mistaken.
Nexstar Media Business
Nexstar Media (NXST) owns and/or operates 200+ TV broadcasting stations primarily in medium sized markets reaching 68% of the United States population (39% with UHF discount). NXST also owns 75% of the CW Network and 31.3% of the Food Network. Broadcasters provide free over the air programming to the market's TV viewers. This includes programs produced by the particular station's affiliate (e.g. NBC or ABC), programs the station produces, and syndicated programming the stations acquire (e.g. re-runs). They are one of the top 3 affiliates of Fox, CBS, NBC, and ABC.
NXST generates revenues from the sale of airtime to local and national advertisers (34% of revenue). About 70% of advertising revenue is local and 30% from national advertising. Local advertising has generally been more resilient versus national advertising. In addition, revenues are generated from the digital media business (8% of revenue) and from cable, satellite, and multi-channel video programming distributors retransmitting the station's signal to their subscribers (55% of revenue). Part of the retransmission revenue is split with the network affiliate (e.g. NBC and ABC) and retransmission revenues provide a large and stable source of contracted revenue for broadcasters. In contrast, with advertising revenue which are prone to economic and political cycles, NXST Retransmission contracts are negotiated every few years and the rates have continued to climb.
Political advertising revenue provides a large source of revenue in even years (e.g. 2022/2020). NXST saw $506M (10% of revenues) in political advertising in 2022, while in 2023 only saw $66M (1% of revenues) in political advertising. Generally, the political advertising spend is greatest on presidential election years.
NXST increased its stake in CW Network to 75% in late 2022. It was, and is currently, an unprofitable segment of the business. Management has reduced losses and plans for the segment to be profit neutral by the end of 2025. The CW Network, while not our favorite acquisition, should provide a valuable growth opportunity to NXST if management is able to turn it around. Finally, NXST 31.3% equity ownership of the Food Network provides them with valuable distributions.
Going forward, an increasing portion of broadcasting revenues will come from digital media and retransmission revenues. NXST has proven their local news stations provide valuable content that people want to watch and this is reflected in their robust financials and metrics.
Broadcasters are Great Businesses
Broadcasters were and remain to be great businesses. TV broadcasters have low capital requirements, recurring revenues, high margins, high cash flows, and strong competitive positions in the regions they serve. Broadcaster that are #1 or #2 in their market achieve a disproportionate share of viewership and revenue versus their competitors. Most of NXST stations are either #1 or #2 in their markets.
While digital advertising has seen outsize growth; this has come mostly at the expense of print advertising. Advertising revenue has proven to be very resilient and retransmission revenues have provided a ballast against advertising revenues that are cyclical depending on the economic and political cycles.
Broadcast advertising revenues have remained resilient with a flat to low single digit growth historically. Advertising revenues have come under pressure and in our opinion it is more reflective of the economic cycle. However, the growth in other revenue streams are more than compensating this decline. Retransmission and digital revenues are experiencing growth in the low to mid single digits rate driving free cash flow growth and diversifying revenues.
NXST has not been subjected to the same pressure of versus cable networks have been with respect to cord cutting. Local TV broadcasters continue to provide a valuable source of local news and live sports which people continue to tune in for. They are consistently some of the highest rated and most viewed segments. This is not what you would expect from an industry that is supposed (or priced) to be dying. Though their glory days may be behind them, broadcasters' futures remain positive.
Looking to the future, the newly elected administration could be a boon for the industry and NXST. The new administration could put forward deregulation of the industry and relax the ownership caps and rules. If this happens, we could see a new wave of mergers and acquisitions for further consolidation in the industry. Further consolidation would allow NXST to acquire more TV stations to increase scale and free cash flows. Further scale would allow NXST to get better prices on for example programming and potentially better rates on advertising.
Management are Excellent Operators and Capital Allocators
The management team (Perry Sook and team) at NXST are excellent operators and capital allocators. Management also owns 6.3% (5.5% being Perry Sook) of the company shares aligning management with shareholders interest. They have some of the most profitable collection of broadcasting assets and a history of great capital allocation. Their mergers and acquisitions of Media General and Tribune is a testament to their excellent operational and capital allocation capabilities, driving enormous value to shareholders. These were the latest in transformational acquisitions. For each acquisition, they paid a good price and were able to integrate each of them into the broader company and actually achieve synergies.
Their latest acquisition of a controlling stake in CW in late 2022 is more questionable. The CW Network is not profitable and produces annual losses around $250M in 2023. NXST will have reduced losses by more than $100M by the end of the year (2024). By the end of 2025, CW should be profit neutral and hopefully profitable thereafter. Currently CW is hiding some of the profitability of the rest of the NXST portfolio because of these losses. As a reminder, 75% of the losses or profits are attributable to NXST.
After the last major acquisition of Tribune, NXST has not been able to buy any significant broadcasting assets due to the broadcasting cap. Instead, NXST has been returning money back to shareholders via dividend and buybacks. Over the last 5 years, they have bought back over 33% of their shares (46.1M Q3 2019 now to 31M Q3 2024) and have consistently increased their dividend and have paid back some debt. This has been internally funded from free cash flows.
For the last 12 months (LTM) NXST has paid $213M in dividends, bought back $514M in shares, and repaid $178M in debt. For a total shareholder return of $905M. Using current share count of 31M, for the LTM NXST has paid $6.87 per share in dividends, bought back $16.57 per share, and repaid $5.74 per share in debt. For a total of $29.17 per share in value on a share price of $170. These are very shareholder friendly actions, management has been capitalizing on its cheap share price and delivering value to shareholders.
Valuation is Very Attractive
NXST currently trades for $170 per share with 31M shares outstanding. For the last twelve months (LTM) FCF (including stock compensation) is $984M or $32 per share. The majority of the political revenue for the year will come in Q4 numbers. In our opinion, over a 2 year cycle 2024/2025 FCF should be around $1085M or $35 per share. This does not take into account improvement at CW or any share reductions. The losses at CW are hiding some of the profitability at NXST. Nevertheless, CW losses by end of the year should be $150M. If things improve further at CW it will only be a boon for NXST FCF.
EBITDA for the LTM was $1,787M with $146M in CAPEX, EBIT was $1,641M. Net debt is around $6,700M with a Net Debt/EBITDA of 3.75x. We think this leverage is reasonable for the business. The 2024/2025 average EBITDA should be higher than what is presented. With a share price of $170, 31M shares outstanding, and net debt of $6,700M the market cap is $5,270M and EV of the company is $11,970M.
At about $170 per share and free cash flow of $32 per share that a P/FCF 5.3x or a FCF yield of 19%. In terms of EV, we have valuations of EV/EBITDA of 6.7x and EV/EBIT is 7.3x and over a 2 year cycle average we think these valuations should be even cheaper. In addition, as NXST mitigates the losses at CW, profitability should meaningfully increase and decrease valuations.
Due to the nature of NXST's broadcasting assets there is little to no major reinvestment opportunities. This allows NXST to use their free cash flow to pay down debt, buy back shares, pay dividends, and make value accretive acquisitions. History has shown that NXST management are great capital allocators and will drive shareholder returns by taking advantage of their cheap share price. These factors including the low valuation will drive enormous value to shareholders over the long-term regardless if the valuation multiple of NXST or the broadcasting industry expands or not.
NXST is not the only cheap broadcaster in the industry. The majority of broadcasters are very cheap on any metric. Some of them are well run and some are not. What sets NXST apart from the rest is their management. They are some of the best operators and capital allocators in their industry and beyond. We think you could make a case for NXST (Perry Sook and team) being the 9th outsider from William Thorndike’s book “The Outsiders”. Intelligent capital allocation is what will really deliver excess investment returns for shareholders in the long term.
Risks
The biggest risk to this investment thesis is a degrading broadcasting industry and/or a misjudgement of management's capital allocation and operation abilities.
If the broadcasting industry degrades materially in a similar vein as the newspaper industry or cable networks. Broadcasters have a lot of operational leverage, and NXST has a not insignificant amount of financial leverage. A degrading industry would have an adverse and poignant effect on the free cash flow of the company. So far, this risk does not appear to be materializing and broadcast TV continues to be widely consumed.
A misjudgement of management's capital allocation and operational abilities is another risk, such as making poor acquisitions or wasting capital. Looking at past actions of management provides comfort that future capital allocation will be excellent.
Bring it all Together
The market is presenting an opportunity to buy a company with attractive assets run by excellent operators and capital allocators at a VERY attractive valuation of P/FCF 5.3x or a FCF yield of 19%. We believe these factors will drive superior returns for shareholders.
ColdBerry Capital is a global value investment fund whose investment philosophy is inspired by Warren Buffett and Charlie Munger. To find out more you can contact us here.
Notes
Price of NXST was $170/share as of writing this article
Financials were taken from NXST most recent annual reports, quarterly reports, and proxy
All $ are USD unless otherwise stated
NXST trades on the NASDAQ
Disclaimer
The thesis expressed above contains forward-looking statements and is intended for informational purposes; it is not a recommendation to buy, sell, hold, or otherwise trade the securities of the referenced issuer. The authors/their affiliates do not hold a position with the issuer such as employment, directorship, or consultancy. The authors/their affiliates currently own a position in the referenced issuer's securities; however, that position may change at any time and without notice.
