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 197 stations covering some 63% of U.S. television households, observes Doug Gerlach, growth stock expert and editor of Investor Advisory Service.
Most of the company’s 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.
A decade ago, about 90% of revenue came from the sale of ads. Since then, retransmission revenue collected from cable and satellite companies in return for the consent to retransmit the signals from Nexstar’s TV stations has grown significantly, stabilizing results. Retransmission revenue accounted for more than 40% of Nexstar’s revenue over the past year.
Political revenue is dependent on the election cycle but averages more than 5% of total revenue. The current hyper-partisan political environment and upcoming presidential election should serve as catalysts for a particularly strong 2020.
Given the importance of scale in the broadcast TV business, acquisitions have been an important part of Nexstar’s strategy. In January 2017, the company completed a $4.6 billion acquisition of Media General, increasing its local broadcast television portfolio by two-thirds and more than doubling its audience reach.
In September 2019 the company completed another sizable acquisition, Tribune Media, in a cash deal making the company the largest operator of local television stations in the country.
Including debt, Nexstar agreed to pay $6.4 billion for Tribune and its 42 local stations, a 31% interest in TV Food Network (which owns the Food Network and the Cooking Channel), and the cable network WGN.
On the back of growth in retransmission revenue and the Tribune transaction, we anticipate Nexstar will be able to grow earnings 20% annually over the next five years. This implies EPS of $14.08 at the end of this period.
Applying a high P/E of 19.1, we get a potential high price of $269. Applying a low P/E of 11.6 to 2018 EPS of $8.21 yields a low price of 95. Therefore, we model an upside/downside ratio of 4.6 to 1 and a potential high return over 17% annually.
