Our timing on adding Sinclair Broadcast Group (SBGI) to Northlake’s portfolio proved poor. Over the past few weeks, we sold SBGI at a loss and reinvested in Nexstar Media Group (NXST). Like SBGI, NXST owns local TV stations around the country, generally in small to mid-size markets. The bull case is also similar: extraordinarily high free cash flow used to pay down debt, buy back shares, and increase dividends over the next few years at the same time as the FCC is relaxing ownership restriction on local TV stations.
Acquisitions of stations are very accretive to NXST and create immediate shareholder value. While these factors create a great outlook for SBGI, we are able to get the same thing at NXST without the distraction of a major acquisition awaiting approval and the subsequent competitive response and complaints. In fact, early this year, NXST closed on the transformative acquisition of Media General and based on 2Q17 results reported this morning, the upside in the new Nexstar is emerging right on schedule.
One other factor that favors NXST is what we know the management team very well (having first invested in 2013 via the Entermedia hedge fund) and find them to among the very best operators of any company we follow. This was also evident in today’s earnings report when the company showed 2Q and early 3Q revenue trends ahead of most all other TV related businesses and attributed the results to new managers at many of its TV stations that were installed after completion of the Media General merger. Furthermore, NXST has performed well on all its synergy targets for the merger, realizing 90% of the goal after just six months.
NXST raised its 2017/1018 average free cash flow guidance reflecting interesting savings on refinancing the term loan it incurred to finance the Media General acquisition. Based on current shares outstanding, that equates to $12.40, a figure that will likely be higher solely due to future share repurchases. The company has aggressively bought shares this year and publicly states its plans to buy more and notes how it is the best thing it can do to create value for shareholders.
With the stock at $63, the free cash flow yield is 20% ($12.50 divided into $63). Most stocks we follow have free cash flow yields of 5-10%. Local TV has always traded cheaply due to concerns it will go the way of newspapers in the internet age. However, 20% is the high end of the normal range at a time when for the first time in a decade the industry has friends at the FCC. Consolidation is the path to saving local TV and it is also the path to shareholder riches as expansion of geographic reach and especially in-market acquisitions (buying a second TV station where you already own one).
We expect a September ruling from the FCC to relax ownership rules to be the next major catalyst for NXST shares. Debt pay down, share repurchases, future accretive acquisitions, a likely increase in Media General synergy targets, and big political ad spending for the 2018 mid-terms set up a series of positive catalysts for the shares between now and the end of 2018. If NXST shares traded at a 15% free cash flow yield, they would rise to $83, a level we still view as a conservative target.
NXST is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. NXST is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.
Since we spend a lot of time writing about quarterly earnings and the subsequent conference calls, we thought you might enjoy reading our unedited notes from this morning’s NXST call. You will learn a lot more about this new investment and also get a sense for what goes on during these calls:
NXST 2Q17 Call Notes (Transcribed from AIM): 8/8/17
-just going over press release type commentary on NXST so far. Brief comments on ad mkt are positive but very big picture.
-since they are not doing pro forma comps for MEG it is hard to get a good read as company has more than doubled in size since 2Q16
-but as usual tone seems better than others
-giving some comp pro forma now. Good expense controls. Went too fast on revs and did not catch it.
-NXST about to start Q&A. They remain confident. Let’s see what the street is worried about.
Q: why are your ad comments more bullish?
A: lots of new station GM’s having a big impact when previously undermanaged by MEG. Unlikely it would be geography or affiliation mix. July local up MSD. Natl flat. Beneficiary of slight improvement in economy. Exceeding budget in august but tricky due to Olympics.
Q: visibility on net retrans?
A: very little unknowns thru end of 18 and into 19. Vast majority affiliation agreements done. High $% of retrans done. CAGR low DD net retrans thru 19. Higher in 17 and 19. Lower in 18 due to deal timing. Only a few MEG NBCs up on affiliation between now and end of next year.
Q: impact of weak network primetime rating?
A: -10% would be -1% impact on NXST advertising. Half of ad rev from local news. Key is 10pm lead into to local news.
Q: would nets object if they made a big acq a la FOX/Ion?
A: never been an issue. Feel like relationships with networks are excellent. Always been able to do business even with tough negotiations.
Q: is July so strong compared to peers?
A: new mgmt impact. mgmt really matters at local level.
Q: on Fox/Ion?
A: same reporter who wrote about Fox/Blackstone. Does not think it would work long term. Head of Ion wandering vineyards in Tuscany last week. Would basically be Ion giving up to become FOX surrogate. Fox has definitely looked so kernel of truth. NXST has looked at Ion as well.
Q: transformative M&A?
A: if they present themselves and bear return on our own stock. Three times a day they discuss capital allocation and most accretive is what wins.
Q: why not buy back even more stock given visibility thru 18?
A: for right now important to pay down debt against a non-political year. Opportunistic toward buyback. In 18 when political returns EBITDA goes up so that provides deleverage. But we can walk and chew gum at the same time.
Q: auto 2Q/3Q?
A: down a couple % in 2Q. Five of top 10 up. Other 5 down but none worse than -3%. Ford and Chevy down. Others good. Dealer spending down a couple %. 3Q…not seeing departure adjusted for Olympics. 2q/3q better than 1q.
Q: sub numbers?
A: YTD absolute loss is less than 50 bps across footprint. Before OTT in most markets. Not sure when OTT will ever be material in our markets. Mostly top 50 markets. Maybe rev in 4Q and 2018 but not material.
Q: all MEG digital biz profitable?
A: done restructuring.
F/U: What is outlook? Katz/SSP?
A: like improved credit profile at SSP. Shut some MEG digital biz in 2Q, will impact revs. Station website biz very strong. Other biz all growing with positive EBITDA. OTT deals worst case equal to current net retrans incl Fox.
Q: private equity interest in space?
A: has been increased activity but no deals. Had some calls and taken some meetings. Would consider private equity as partner in a larger deal. Seen thesis of taking NXST private, math works. No synergies for private equity in bidding against actual operators like NXST. But they will leverage to 6X and push up multiples.
-take retrans growth out several years on gross basis and digital at LDD and NXST is 60/40 non TV advertising
-old JSA rules coupled with end of 8 voice and 2 of top 4 taken together create most opportunity.
-OTA local ad rev is 14% across entire 210 markets. Stupid to think of it as its own markets. Think FCC and DOJ agree but FCC ahead of DOJ.
Q: ATSC JV?
A: calls with other broadcasters who might want to join. Hiring CEO for venture. Repack will jump start investment in 3.0. That has to be done first before monetization. That being investment at local level to upgrade to 3.0. Other side of 39 months…material rev 5 years away. Want to manage your expectations but it is real. Over time spectrum revs could equal retrans rev! Notes that is his opinion not universally held view.