Nexstar Media Group (NXST) reported another in a string of excellent quarterly earnings reports.  Revenue and EBITDA exceeded management guidance and the company raised the all-important annual free cash flow guidance.  NXST has always benefitted from having one of the best management teams across all the industries we follow in terms of operating execution and corporate strategy.  Currently, the company is getting a boost from a surging advertising market as companies try to capture sales and market share during the domestic economy’s reopening phase.  We still see upside for NXST shares and can easily justify much higher target prices than we currently calculate.  We plan to continue to hold NXST shares for Northlake clients investing in our individual stock portfolio strategy.

Earnings Reaction:  NXST shares responded positively to the earnings report and guidance increase, moving up about 5%.  This is encouraging after several months of sideways action even as evidence mounted that business fundamentals were very strong.  Normally, “beat and raise” quarters are rewarded but recently that has not been the case for many companies that are heavily exposed to the reopening of the economy.

Earnings Analysis:  NXST’s strong quarter was built upon surging advertising spending and the national footprint of local TV stations the company has built.  Core advertising is almost back to 2019 levels even as auto advertising, the largest category pre-pandemic, lags amid shortages of new cars for sale.  Services have stepped up with sports betting becoming a new top-five category that should be here to stay as more states approve and competition among service providers remains intense.  Local advertising has lagged national advertising, but NXST’s national reach allows it to participate to a limited extent in national.

The other big piece of NXST’s profit is the net retransmission fees it receives.  NXST is paid by cable, satellite, and OTT companies for the right to provide its TV station feeds.  In turn, NXST pays ABC, NBC, CBS, and FOX for the rights to national network feeds. Net retrans has been a steady growth engine for the local TV industry.  NXST has outperformed its peers thanks to its national scale giving it leverage in negotiations with networks.  Along with the entire industry, NXST has also gained from increased viewership of local TV news during the pandemic.  The big risk to this profit line is from cord cutting.  Cord cutting has slowed of late but remains near 5%.  NXST is able to get annual price increases in excess of the rate of cord cutting as local TV remains underpriced relative to its level of viewership.

Comparisons stiffen over 2H21 against massive political ad spending during last year’s election cycle.  This does not concern us as we look ahead to what should be an equally strong election cycle in 2022 with both the House and Senate up for grabs.

Target Price:  Using a conservative multiple on average 2021/2022 EBITDA, we maintain our target of $180, up 16% from current trading levels.  We can easily justify a target of $200.  Management is buying back shares steadily now that the balance sheet has been repaired after the acquisition of Tribune.  We see balance sheet capacity for much higher share buybacks over the next few years as a key catalyst toward achieving higher target prices.

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.