Nexstar Media Group reported excellent 4Q19 results and raised its guidance for 2020/2021 average annual free cash flow by 15%.  In a normal market this news would have been greeted by a sharp rise in the stock price, arguably up 5-10% or more.  Alas, Nexstar reported right into the teeth of the market sell-off on Tuesday morning and after an initial and short-lived pop, the shares sunk over -5% and fell a further -4% before reversing and regaining most of the initial losses on Thursday.

Nexstar has completed and integrated its acquisition of Tribune Media and is now the largest owner of local TV station across the county with many larger markets to go along with its historic focus on small and mid-sized cities.  Driven by huge gains in political advertising, even beyond the incredible spending by Michael Bloomberg, and a healthy market for traditional local TV advertising, Nexstar easily exceeded consensus estimates for 4Q19.  Even better for our bullish investment thesis, the company raised its 2020/2021 average free cash flow guidance by 15% from what it had issued just last August.  Political spending, greater merger synergies, stronger ad markets, a dose of typical Nexstar conservatism, and usual superior Nexstar management execution all contributed to the guidance increase.  The company is now calling for average annual free cash flow per share of $25.50 for the next two years.  Most of this free cash flow will be used to reduce debt associated with the Tribune acquisition but the company is already buying back shares a year ahead of schedule and just raised its dividend by over 20% for the fourth straight year.

As long-time media investors who have suffered on occasion in this year of cord cutting and streaming video (CBS and Comcast come to mind), we fully understand the risks facing Nexstar and local TV.  We have long thought, however, that the free cash flow at local TV stocks was vastly underappreciated and undervalued by investors.  Nexstar has been an excellent performing stock against the secular headwinds faced by traditional media and we believe that will continue for the next year or two on the back of the massive free cash flow.  Free cash flow represents 23% of the current stock price.  There are very few stocks with this cheap of a valuation on this metric and even fewer that are as well managed as Nexstar.  We see upside to $130-150 this year potentially to $170 in 2021 if the company meets its newly issued guidance.

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.