Nexstar Media Group (NXST) reported solid 1Q19 earnings with all important metrics matching Wall Street expectations.  Core advertising, retransmission fees, and profit margins all stayed on the recent positive trend.  Advertising has improved since last fall providing a nice boost to investor confidence.  Retransmission or subscription fees are now about half of revenues making NXST more predictable and less cyclical.  Any stability in advertising, which has been weak across most television media, is a welcome development.  The company did have a shortfall in digital revenue but this was purposeful as management culled unprofitable revenue streams to focus on local TV station digital efforts.   Management reiterated standalone 2018/2019 guidance although investor focus has shifted to the 2019/2020 outlook pro forma for the company’s acquisition of Tribune Media that should close by the end of September. As a reminder, local TV broadcasters are valued and analyzed on a two year cycle due to the Olympic and election cycles.

We met with NXST management in April and May at industry conferences.  It is clear to us and other investors that the company’s pro forma guidance for 2018/2019 free cash flow issued at the time of Tribune merger announcement is too low.  Furthermore, the outlook for 2019/2020 is also higher than what we initially expected.  Improved core advertising, continued growth in political advertising, and higher merger synergies now that management has gotten to look deeply inside Tribune all support strong growth in 2019/2020 vs 2018/2019.

Management has implied that initial pro forma merger guidance is too low but they prefer to wait until the deal closes to update the investment community.  We are highly confident that 2018/2019 pro forma free cash flow per share guidance averaging $19.50 will be easily exceeded.  More importantly for NXST shares, we see good growth in pro forma 2019/2020.  Our spreadsheets indicated this could be as high $22.00 per share although given management’s conservative guidance history – which has served investors well – we would not be surprised to see a lower number issued when the merger closes.

NXST shares have been great performers, up 34% this year and 56% in the past twelve months.  While these gains are large, the massive accretion of the Tribune deal and better than expected organic growth leaves the shares valued similarly to where they were a year ago.  Based on operating cash flow or free cash flow, we see another 25-30% upside for NXST shares as long as fundamentals in advertising, subscriber counts, and network relations remain stable.

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.