Nexstar Media Group (NXST) reported strong 1Q21 earnings highlighted by a faster than expected improvement in core advertising, continued upside in profit margins, and a big beat on EBITDA.  Management reaffirmed its key guidance metric based on the average of 2021 and 2022 free cash flow.  The cyclical nature of political spending requires use of a two-year average when analyzing local TV broadcasters.  In 2020, NXST earned over $500 million in revenue from political ads and should be near the same in 2022.  In 2021, political ads will be 90% or more below these figures. 

NXST guides to an absolute dollar amount of average free cash flow.  The current guidance calls for $1.3 billion per year.  As we noted in our last company update, NXST has successfully completed its strategic transformation and is now in position to use its massive free cash flow to directly support shareholder value through dividends and share buybacks.  The company is executing quickly on the buyback announced just a few months ago.  On today’s conference call, management indicated that a total of $500 million in shares could be purchased this year.  Repurchases so far total over $100 million and are being made at current prices despite a gain of over 30% for the shares already in 2021.  At current prices, the $500 million buyback would retire about 7% of the current shares outstanding.  We expect a larger buyback in 2022 and 2023 after the boost in free cash flow from political spending occurs next year.  Debt leverage will remain under 4X, and unless buybacks remain elevated, debt will move much lower over the next few years.

NXST shares trade at a 20% free cash flow yield.  As a comparison, leading blue chip growth companies often trade at a yield of just 3-5%.  Investors do not value NXST free cash flow highly because of the threat to the company’s financial profile from streaming and fragmentation of TV viewership.  We remain vigilant on these factors but do not believe they are likely a factor before late in 2022 when NXST will be negotiating its carriage agreements with TV networks and cable, satellite, and streaming services.

We think this window will provide at least one more move materially higher in NXST shares.  We maintain our target price of $180, up 20% from current levels.  We believe this is a conservative target based on just 7.5X 2021/2022 EBITDA.  The key metrics to watch over the next few quarters will be the strength of the recovery in advertising and trends in cord cutting.  Advertising holds potential to surprise to the upside and we are wary but expect cord cutting to be stable. Today’s action in NXST shares, up slightly after trading several percent lower on a bad market day, is encouraging and supports our bullish outlook.

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.