Nexstar Media Group (NXST) reported another great quarter driven by political advertising and tight management of operating expenses.  Results easily exceeded recently raised consensus estimates.  Throughout 2020, this has been a consistent pattern for NXST, a testament to the strength of the management team and the strategic and financial success of the acquisition of Tribune Media.

NXST shares have rallied well off the March pandemic lows but we are frustrated that the stock is not much higher.  We think the shares are easily worth over $100 and without heroic assumptions our target is $120 or 7 times the average of 2020 and 2021 EBITDA with credit for free cash flow to be earned from now through the end of 2021.  Advertising is recovering steadily and almost half of revenue and EBITDA is locked in through affiliate fees and programming expenses.  Local TV broadcasting is naturally a high free cash flow business and the boom in political spending this year is allowing NXST to pay down a lot of the debt used to by Tribune.  Leverage should be under 4X, below historical levels by the end of 2020.

We believe that lower leverage, a continued cyclical improvement in advertising, and a recognition that political advertising is a growth category can support a 7X EBITDA multiple.  Gray Television, a smaller but still significant TV broadcasters, noted that on the 2016, 2018, 2020 election cycles political spending at their stations went from $118 million to $234 million to $380 million.  President Trump will soon be gone but we have a hard time believing that politics will become any less heated.  NXST will get another boost to free cash flow in 2022.  In 2021 and 2022, the company will earn over $2 billion in free cash flow against a market cap of under $4 billion. 

With leverage below 4X, the company will be able to continue raising its dividend by 20% a year and buy back 20% or more its shares in the next 24 months.  Short of another sharp downturn in the economy, something we do not project, it seems the shares have limited downside and considerable upside.  Finally, investors remain focused on the growth vs. value theme.  Northlake has plenty of growth exposure in the individual stock portfolio with Apple, Alphabet, Facebook, Activision, and Home Depot.  NXST provides high quality exposure to value should a sustained rotation toward value stocks come into play. 

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.