Nexstar Media Group reported inline but mixed results for 1Q18. Importantly, the company reiterated its 2018 guidance for $13.10 in average annual free cash flow per share in 2018 and 2019.  The political cycle leads investors in local TV broadcasters to look at valuation on a two year basis.  Normally, Northlake tries to avoid a lot of numbers in these quarterly earnings updates.  In the case of NXST, we point out the free cash flow because $13.10 represents 19% of the current stock price.  Given management’s track record at hitting or exceeding its guidance, raising the quarterly dividend, buying back shares, and accretively purchasing additional TV stations, we find this level of free cash flow extremely attractive.  We remain highly confident that one way or the other this cash flow will be put to use to enhance shareholder value driving NXST shares to at least $80 over the next year.

Free cash flow yields in local TV broadcasting stocks are among the highest of any industry we follow.  Most other industries have yields in the 3-10% range.  Investors appear to view stations as going the way of newspapers.  We agree the industry faces challenges but the bearishness implied by NXST’s valuation is far too steep.

NXST’s 1Q18 results offered mixed news on these challenges.  The disappointment was in core advertising growth, which fell 3%, well short of management’s guidance.  It is extremely rare for NXST to miss guidance on any metric but the company was not alone as ad trends throughout local TV were weak.  Good expense control, a hallmark of NXST, and strong political advertising made up for the core advertising shortfall.  Retransmission consent fees hit guidance and margins on this revenue held up well.  A big concern for investors is the increasing share of retrans that is being clawed back by the network owners (ABC, CBS, FOX, NBC).

Looking ahead to 2Q18, management expects little improvement in core advertising.  Auto advertising remains weak and the national ads that air on local stations generally are holding back growth.

Several catalysts lie ahead for the industry.  News on approval of the merger between Sinclair Broadcasting and Tribune Media is likely in the near-term.  A decision in a court case concerning the UHF discount could come this summer.  The FCC is likely to expand the national ownership cap this fall or winter.  NXST is well positioned regardless of the outcome of these decisions thanks to its free cash flow.  Volatility in the shares in both directions is likely as the news is released.  We are willing to absorb any downside in the shares as long our outlook for the U.S. economy is positive.

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.