Nexstar Media Group (NXST) reported another solid quarter, further cementing the company as the most consistent, highest quality local TV broadcaster.  A boom in political TV advertising and excellent expense control led to the company beating expectations for EBITDA, the key valuation metric for the industry.  Critical to NXST and the industry is converting EBITDA to free cash flow.  Currently, NXST estimates $13 per share in average free cash flow in 2018 and 2019.  TV broadcasters use two year averages to smooth out the political cycles.

A couple of years ago, NXST grew to be the second largest owner of local TV stations when it purchased Media General in a highly accretive transaction.  Since that deal closed, NXST has used its free cash flow to pay down debt, repurchase shares, and pay a rising dividend.  By the end of this year, the balance sheet should be in good shape to pursue another accretive transaction.

With the FCC loosening ownership rules and several attractive broadcasters actually or theoretically for sale, the big question for NXST is what comes next?  Another highly accretive leverage acquisition?  A massive share buyback?  Going private as was rumored recently by Reuters?

We like all three options as each offers substantial upside to the current stock price.  We can easily construct a scenario under any option that lifts the stock to at least $90-$100 over the next year or two.

The NXST story is not without risk.  Cord cutting and the fragmentation of TV viewing hurts the company’s retransmission and advertising revenue.  The big four networks, of which most of NXST’s stations are affiliates, are demanding ever higher payments form the company for the right to maintain the affiliation.  The recent blocking of the Sinclair Broadcasting/Tribune merger by the DOJ and FCC has created uncertainty about the company’s freedom to pursue large scale M&A.  Finally, TV broadcasting is a cyclical business and any economic weakness would hurt results and pressure the stock’s valuation.

Every quarter that goes by where NXST shows good performance and industry leadership builds our confidence that the end game will balance out favorably.  We were especially pleased when management was very firm on the conference call that it would do what is best for shareholders, who include senior management.

We are not sure what the next big news is going to be but we expect to hear something from NXST before year end.  Northlake will happily stick around at least until then.

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.