Nexstar Media Group (NXST) reported good 4Q17 earnings with strength in political and digital advertising offsetting slightly worse than expected growth in retransmission fees.  Guidance for 2018 and 2019 was limited to average annual free cash flow.  At $600 million per year, it was below street expectations.  The culprit appears to be timing of renewals on retransmission fees (paid to NXST by cable, satellite, and OTT operators for the right to carry their local TV station signals).  Retrans fees have been rising steadily as TV stations get paid more closely to the level of viewership they provide.  NXST had relatively few stations renew during 2017 and that occurs again in 2018 before 80% of their stations renew in 2019.  The level of retrans revenue expected in 2020 is unchanged, reinforcing the timing nature of the lower expectations.

Northlake remains highly confident in its long position in NXST.  The company produces prodigious free cash flow averaging over $13.00 per share the next years.  FCF represents 18% of the current stock price, a level 2-4 times that of most stocks.  Investors have little faith in the long-term outlook and financial forecasts for media companies, so NXST is not alone in looking cheap.  We believe (1) the company has among the best management teams we know, (2) the new guidance is conservative and likely to be exceeded, and (3) local TV is insulated from the challenges facing traditional media as local TV is about local news, where TV ratings are holding up well during a period when news has risen in importance in the national conscious.

NXST shares have pulled back about 5% since the earnings report and lack a near-term catalyst.  However, we expect increased visibility on 2018 advertising trends, further industry mergers and acquisitions following recent deregulation of the industry, and debt reduction will reignite interest in NXST shares.  Quickly forgotten was a recent 20% increase in NXST’s dividend, a clear signal of the confidence of the Board and management in the outlook for modest growth and incredibly strong cash generation.  We see upside in NXST shares to at least the mid-$80s and could easily construct a scenario where they approach $100 in the next year or two.

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.