Nexstar Sets the Stage with a $1.5 Billion Additional Share Repurchase – Buyback Wednesdays

 

Last month after we published a C-suite transitions article about the broadcasting company TEGNA (TGNA), I got a chance to discuss a smaller competitor Entravision Communications (EVC) and the broadcasting segment in general with a professional investor. He had been following a group of broadcasters for a decade and felt that both TEGNA and Nexstar were high quality names in this segment. I did a deep dive into TEGNA and picked it as a spotlight idea for our August 2024 Special Situations Newsletter.

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When I noticed that Nexstar had announced a large stock buyback, I was excited at the opportunity to learn more about one of the biggest players in the broadcasting segment.

Companies led by their founders often have an added advantage due to the founders’ deep commitment and long-term vision. Nexstar Media Group (NXST), a major player in the American media landscape, is run by owner-operator CEO Perry Sook. Over the past 25+ years, Mr. Sook has played a pivotal role in transforming Nexstar from a single station into the nation’s largest local television and media company. Under his leadership, Nexstar now controls 200 stations, collectively reaching 39% of television-owning households. This remarkable growth showcases Sook’s strategic acumen, which has been instrumental in driving Nexstar’s expansion and success in the competitive media industry.

Nexstar Media Group, Inc. (NXST): $172.02

Market Cap: $5.65B

EV: $12.43B

Key Insights

·         Nexstar is a diversified media company with a strong presence in both local and national broadcasting, as well as a growing digital footprint. 

·         The company’s stock price has been almost flat over the last year but has skyrocketed over the last decade, rising by over 280%.

·         The business demonstrates cyclicality, with peak performance in even-numbered years due to political advertising.

·         Management is committed to buybacks, repurchasing 10% of the float per year, while increasing dividends for 11 consecutive years.

·         Management is optimistic that its recently acquired broadcasting network CW, will turn cashflow positive in 2025.

·         Revenue associated with distribution in Q1 2024 was at an all time high of $761 million, growing 4.5% YoY.

·         Rising political ad spending is expected to significantly boost Nexstar’s revenue and profits in the second half of 2024.

With a team of over 13,000 employees across America, Nexstar produces more than 310,000 hours of news, sports, and entertainment programming a year and plans to expand its local programming over the coming year.

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Of its 200 stations, 155 are affiliated with the four national broadcast networks: CBS, Fox, NBC, and ABC. Nexstar’s national television properties include The CW, America’s fifth major broadcast network, NewsNation, its national news network providing “News for All America,” popular entertainment multicast networks Antenna TV and Rewind TV, and a 31.3% ownership stake in TV Food Network. The Company’s portfolio of digital assets includes its local TV station websites, The Hill and NewsNationNow.com.

Business Model

Nexstar generates revenue through two main channels:

·         Advertisements (41% of revenue): In election years, Nexstar earns a lot from political advertising, since local TV viewers tend to be consistent voters.

·         Distribution Revenue (59% of revenue): Nexstar earns its largest revenue segment by selling content to cable, satellite, Multichannel Video Distributors (MVPDs) and Online Video Distributors (OVDs). This includes retransmission and carriage fees, which are highly profitable and based on subscriber numbers. Additional distribution revenue comes from affiliation fees paid by The CW affiliates and from leasing spectrum to programmers in selected local markets.

Growth Through M&A

Sook’s strategy of acquiring TV stations at low single-digit multiples of free cash flow proved highly successful. In 2017, Nexstar acquired Media General for $4.6 billion, adding 71 stations and elevating Nexstar to the level of Sinclair Broadcast Group, Tribune Media, and Tegna Media. The acquisition was so substantial that Nexstar had to divest 13 stations for $548 million to secure FCC approval.

Nexstar’s stock surged ~750% from its 2003 IPO to the 2019 Tribune Media acquisition for $7.2 billion (including debt), making it the largest local television broadcast and digital media company in the nation. Since then, management has rightly shifted focus to growing distribution revenues after a long series of acquisitions.

Cyclical Business

The business demonstrates cyclicality, with peak performance in even-numbered years, influenced by political campaigns and major events. Highest advertising revenue is reported in the second and fourth quarters due to seasonal consumer and retail advertising.

Management

Nexstar’s success can be attributed to its management team with the founder CEO at the helm. The firm’s President and Chief Operating Officer Michael Biard also has extensive experience in media and network distribution. Prior to joining Nexstar in August 2023, Mr. Biard spent 23 years with FOX Corporation (FOX), serving as President of Operations and Distribution. In November last year, the company’s CFO Tom Carter retired and Ms Lee Ann became the new CFO. Interestingly, she had previously worked with Tom Carter at Bank of America.

Valuation

Nexstar is currently undervalued, with a forward P/E of 6.91 and a forward EV/EBITDA of 5.86, both significantly below the sector median and its 5-year average. This low valuation likely stems from market concerns about potential weakness in distribution revenue, apprehensions regarding the recent acquisition of The CW Network, and the persistent belief that local TV is in terminal decline. This undervaluation may be a key factor motivating management to repurchase shares.

Financial Performance

Nexstar has a market cap of $5.81 billion and an enterprise value of $12.58 billion. The company generated nearly $5 billion in revenue for the 12 months ending March 31, 2024. Revenue has skyrocketed from $631.3 million in 2014 to $4.93 billion in 2023, achieving an impressive CAGR of 25.2% over the past decade. During this period, diluted EPS surged from $2 to $11.3. As of the last reported quarter, the company holds $237 million in cash and short-term investments, including $90 million of cash related to the CW. Current liabilities are well covered by current assets, reflecting a strong liquidity position. However, Nexstar has a net debt of $6.5 billion. The company has been actively working to reduce this debt and should continue to prioritize debt reduction. Its LTM leverage was 3.7x and the company expects it to be in the 2s by the end of the year.