Nexstar Media Group (NXST) is the largest owner of local television stations in the U.S. The company owns, operates, programs, or provides services to 198 stations covering approximately 60% of U.S. TV households, notes Doug Gerlach, editor of Investor Advisory Service.
Most of its station portfolio is comprised of network affiliates of the big four networks: ABC, CBS, Fox, and NBC. These network relationships give the company the exclusive right to broadcast primetime network content in its markets in exchange for affiliation fees.
The networks retain the right to sell most of the advertising time during network broadcasts, though Nexstar is typically allocated slots during these broadcasts. In addition to network content, Nexstar’s stations air programs the company produces itself, such as local news, as well as syndicated programs its stations acquire.
The company receives the advertising revenue from non-network programming. Historically, the company’s primary source of revenue had been the sale of commercial air time to local and national advertisers providing more than two-thirds of the company’s revenue a decade ago.
Given the sensitivity of advertising to the economy, operating results could be volatile. Since then, retransmission revenue collected from cable and satellite companies in return for the consent to retransmit the signals from Nexstar’s television stations has grown significantly, stabilizing results.
Retransmission agreements typically cover three-year periods and have built-in escalators. Retransmission revenue accounted for nearly 50% of Nexstar’s revenue in the past year.
The big four networks are the most watched channels in the cable bundle, and the general belief is they have not been monetized at a rate consistent with viewership.
Work to more closely harmonize monetization with eyeballs is part of what has driven retransmission revenues— and your cable bills—higher. Continued growth in retransmission revenue is expected to serve as a tailwind in coming years.
Nexstar has solid visibility into its distribution economics over the next couple of years, as it has locked in retransmission agreement renewals covering 88% of its subscribers and agreements covering more than 85% of its big four network affiliations through 2022. These agreements are expected to result in a continuation of double-digit retransmission revenue growth.
Cord cutting remains a headwind to retransmission revenue growth and renewals with cable providers continue to be closely scrutinized for signs recent trends in retransmission economics will not continue.
In negotiating retransmission rates with cable and satellite companies Nexstar negotiates for both itself and on behalf of the networks. The company then pays a portion of the retransmission revenue to the network as outlined in its affiliation agreement. Generally, this has run around 50% of gross retransmission revenue, though it has been trending higher.
Political revenue is dependent on the election cycle but averages more than 5% of total revenue. The political cycle means company results in even years typically outpace odd years. The current hyper-partisan political environment has served Nexstar well and the 2020 election resulted in record political revenue.
On the back of continued growth in retransmission revenue, strong political advertising tailwinds, and share repurchases, we anticipate Nexstar will be able to grow earnings 10% annually over the next five years. This implies EPS of $27.97 at the end of this period. Applying a high P/E of 15, we get a potential high price of $419.
Using a low P/E of 8 combined with a downside scenario where the trends in retransmission revenue do not hold up and EPS reaches a low of $12.00 results in a price of 96. Therefore, we model an upside/downside ratio of 5.2 to 1 and a projected high return of nearly 25% annually.
