Nexstar Media Group (NXST) has been one of Northlake’s best performing stocks this year.  The shares are up 38%, including a gain of about 10% since the company reported third quarter earnings last week.  NXST has attracted investors due to its highly accretive acquisition of Tribune, which makes NXST the largest owner of local TV stations in the United States.  NXST shares peaked in the spring at $118 and pulled back over the summer and fall as fears about cord cutting and advertising growth increased.  With modestly improving ad trends in the third quarter and a big year of political advertising ahead in 2020, investor confidence has reemerged.  We think the recent rally has legs and the shares can see news highs in 2020.

Another reason for the pullback in NXST shares was fear of a hard to analyze third quarter that contained a lot of complicating financial factors due to the close of the merger in September.  Management did an excellent job of isolating one-time issues and affirming the positive guidance it gave in September when the Tribune acquisition officially closed.   One fresh positive is that the company’s balance sheet has a little less debt than expected after paying for Tribune.  This means that NXST can reach its debt reduction targets ahead of schedule and begin to buy back stock and increase its dividend with the massive free cash flow the company generates.  One of NXST’s peers, Gray Television (GTN), closed on its own large acquisition in the spring and is about six months ahead of NXST in reducing debt leverage.  In conjunction with its 3Q19 report, GTN initiated a share buyback ahead of schedule.  Investors see this as a path for NXST and this has helped boost NXST shares since last week’s earnings report.

NXST has projected free cash flow of around $22 per share on average for 2019/2020.  TV station owners are analyzed on two year average due to the huge swings that come from political and Olympic advertising spending in even years.  Wall Street likes to look ahead and NXST will issue 2020/2021 guidance in February after it reports 2019 full year results.  Led primarily by another step up in the retransmission payments that NXST receives from cable, satellite, and streaming distributors, we think the 2020/20201 free cash flow could reach $24 per share before considering the impact of share buybacks that may begin in 2020 and accelerate in 2021.

On the basis of free cash flow yield at 18% to 20% or total enterprise value to EBITDA at 6.5X to 7.5X, we think NXST shares can rally to $120 to $145 in 2020.  Key to reaching these targets are no further acceleration in cord cutting, low but stable growth in core local TV advertising, and most importantly, political advertising meeting high expectations.  Northlake thinks NXST has one of the best management teams of any company we closely follow and we plan to stick with the shares with the knowledge they can be highly volatile.

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.