Nexstar Media Group (NXST) reported better than expected 4Q20 results despite elevated expectations.  More importantly, guidance for free cash flow in the 2021/2022 cycle came in way above estimates.  The 21/22 outlook validates the strategy that NXST has followed since we first became familiar with the company back in 2013.  NXST management has steadily built the company through acquisitions of local TV stations across the country to now be the largest owner of local media assets in the country.  An example of the company’s reach is that its TV stations reach 370 out of the 435 Congressional districts.  This scale has long been the holy grail for NXST as it improves the company’s negotiating power with TV networks, cable, satellite, and streaming companies.  Accompanied by strong operational and financial management and a business model that requires little in the way of capital spending, NXST’s scale allows for prodigious free cash flow production.  The stock is up 10% on the news to a new all-time high but we think there is still plenty in the tank. 

Management borrowed a lot of money to grow from just a handful of stations to its current national reach.  The acquisitions culminated with the purchases of Tribune Media in 2019.  At the close of the Tribune deal, debt exceeded 5 times EBITDA, a worrying level for investors.  Northlake always appreciated the free cash flow characteristics and trusted NXST’s excellent management team to pay down the debt.  The pandemic added huge pressure and the shares fell below $50 in March and April 2020 as advertising dried up and cord cutting accelerated.  We remained confident knowing that a huge year in political adverting laid ahead that would at a minimum provide cash to reduce debt.

Management navigated the pandemic perfectly by focusing on finding new advertisers, cost cutting, debt refinancing, and debt reduction.  Many of the cost cuts are permanent and paying down $1 billion in debt reduces interest expense.  To show confidence in its outlook, a few months ago, management raised the dividend 10% and initiated a large share buyback.

Local TV broadcasting is a tough industry.  NXST faces challenges as viewership fragments and digital advertising steadily gains share.  Fortunately, local TV broadcasting is also a high free cash flow business as little capital needs to be reinvested in the stations.  NXST already reaches the maximum percent of the population allowed by the FCC.  This means that large acquisitions of additional TV stations are off the table.  Small acquisitions to leverage the reach of the TV stations and the station websites are possible.  In addition, a pending Supreme Curt ruling could allow the company to own duopolies in the larger metropolitan areas it serves.  However, we expect most free cash flow to be used to support share value via dividends, share buybacks, and further debt reduction.

We find it easy to support a price target near $180, up another 25%, without stretching our valuation multiple.  NXST shares have often been a bumpy ride in the last eight years and we expect periodic stretches where concerns about the twin pillars of revenue – advertising and net retransmission fees – create volatility in the stock price.  Northlake is willing to ride out these phases knowing the company has a great management team, competitive scale, and a superior financial profile.

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.