Nexstar Media Group (NXST) reported strong 4Q18 results and issued positive initial guidance for 2019 and 2020 on a standalone basis.  NXST should complete its acquisition of Tribune Media in 3Q18 and reiterated initial guidance that the combined company will earn at least $900 million in average free cash flow in the 2019/2020 cycle.  Local TV station owners are analyzed based on two year averages due to the large influx of political advertising in election years.

NXST has been a great stock, up 50% since May 2019 and at a new all-time high after gaining over 4% in initial response to its earnings report and guidance.  We have long felt that NXST offered exceptional upside as the company produces massive free cash flow relative to its market capitalization.  Northlake is highly confident that the Tribune merger will close and thus values NXST on the company’s pro forma guidance.  Even after rising nearly 20% just in February, the shares offer a free cash flow yield north of 20% based on 2019/2020 free cash flow per share of $19.73.  We see that guidance as potentially conservative given management’s track record of beating operating and synergy guidance.  As a comparison, other secularly challenged media stocks such as cable and cable TV networks trade at free cash flow yields of 5% to 15%.  Regional casinos, which have a similar growth and financial profile to local TV broadcasters trade at free cash flow yields of 10-15%.

In its 4Q18 earnings report, NXST noted that local and national advertising fell a little less than -2%.  Given that political spending was an all-time record and displaced traditional advertising for October, this suggests that November and December could have shown positive advertising growth.  Management also guided 2019 core advertising (non-political) to be positive. With growth in retransmission fees up double digits for the next several years, any stability in advertising should allay secular fears about the future of local TV stations as TV consumption continues to fragment toward digital distribution such as Netflix and Hulu.

Increased investor confidence in local TV’s long-term outlook should allow the free cash flow produced by NXST to be more highly valued.  Northlake sees NXST shares offering upside from $111 to $133 over the next twelve months assuming that economy holds to recent slow levels of GDP growth in the 2% plus range.  We know NXST management well and find them to be among the best in any industry and plan to remain confidently long as they navigate through the Tribune merger and the secular challenges.

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.