Nexstar Media Group (NXST) reported 2Q results very slightly below consensus estimates.  All guidance was reiterated.  The company guides based on average 2018 and 2019 results given the highly cyclical nature of revenues due to political and Olympic advertising only occurring in even years.  Management is careful about guidance and admitted on the call that its guidance has a cushion, so with 18 months of the 2018/2019 cycle complete it is not surprising that guidance was maintained.

NXST is on the verge of closing its acquisition of Tribune Media.  This is hugely important to the NXST investment thesis as the deal is at least 46% accretive to the company’s current standalone 2018/2019 free cash guidance.  Presently, NXST has guided to about $615 million in average free cash flow over 2018/2019.  Pro forma for the Tribune acquisition current guidance is for over $900 million in free cash.  On the 2Q19 conference call, NXST management admitted that once the deal closes, hopefully within a few weeks (received Justice Department approval already), it will be raising guidance.  This is not surprising to Northlake as NXST has a long history of exceeding its initial merger synergies.

To gain approval for the Tribune acquisition, the company sold a large number of stations at a better price and a higher valuation than expected.  This will allow the company to start its next chapter with lower debt levels than planned.  Along with the sharp drop in interest rates of late, this is a source of upside to guidance.  We also expect cost savings to be higher than initially budgeted and note that Tribune has reported results at least as good as expected so far in 2019.

NXST shares have been under pressure due to secular concerns about the future of the retransmission fees it charges cable, satellite, and OTT services for the right to transmit its channels.  This concern has been exacerbated by a blackout of NXST’s stations on DirecTV as it negotiates a new carriage agreement with AT&T.  We expect this issue to be resolved over the next four weeks which should allow investors to reward NXST shares for the 20-25% free cash flow yield the company will earn in the 2019/2020 cycle.  Furthermore, concerns about debt levels should recede given the huge inflow of political dollars ahead in 2020.  Debt should be at a moderate level by the end of 2020.  NXST is up against the current cap on TV station ownership so as debt comes down the company will resume share buybacks and sustain its history of double digit growth in dividends.  We think the stock can challenge recent highs near $120 over the next twelve months, providing upside of over 20% from current levels.

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.