Nexstar Media Group (NXST) shares responded well to the company’s 1Q20 earnings report as investors gained a better understanding of the stability of the company’s free cash flow.  Shares in NXST were pummeled in the initial stages of the COVID-19 crisis despite a much less cyclical financial profile than the company had in Great Financial Crisis.  Since then, NXST has gone from almost 100% advertising revenue to receiving over 50% of revenue from subscription fees paid by cable, satellite, and steaming providers.  There is no doubt that core, non-political advertising is suffering deep declines since Mid-March; perhaps on the order of -40%.  However, subscription revenue is growing around 15% this year and next as the company has been able to reprice recently expired deals more in line with the value provided by still heavily watched local news.  This value may be getting enhanced during the current crisis with local news viewership up 30-60% as homebound individuals seek information about the spread of the disease and the economic shutdown in their cities and towns.

The decline in core advertising has begun to lessen and should rebound further as economies around the country begin to reopen.  Nonetheless, our expectation is that NXST will see 2020 operating cash flow decline materially from our prior expectations.  However, lower interest rates, tax breaks in the CARES Act, cost cutting, and lower capital spending is allowing the decline in free cash flow to be much more modest.

Free cash flow is the crucial financial metric at NXST since the company’s debt level is elevated after its purchase of Tribune in 2019.  Based on guidance provided by the company with 1Q20 earnings, NXST’s balance sheet should still improve greatly in 2020, especially given the big boost from political advertising that will come starting around Labor Day.  Once debt is reduced, NXST should resume share repurchases and dividend increases in 2021.  In a positive sign, NXST is maintaining its dividend during 2020.

NXST clearly faces risks should the reopening of the economy go poorly and/or a significant second wave of COVID-19 emerge.  In addition, the company faces secular pressure on subscriber counts as households cut the cord.  The valuation of NXST shares already discounts these risks.  The stock has rebounded from the upper $40s at its March low to the upper $70s.  Pre-COVID, we thought NXST shares could reach $130-150 in 2020.  We now project upside to $90-100 with our prior targets coming into play during 2021.  NXST is one of the most sensitive stocks among Northlake’s portfolio to the economy and COVID-19 crisis.  We believe portfolios should be structured as a barbell between less cyclical and more cyclical stocks.  NXST’s history and strong management make it an ideal piece at the cyclical end of the barbell.

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.