Powered by the intense election fight, political ad sales drove Nexstar Media Group (NXST) to better than expected 3Q18 earnings.  Management raised guidance for the year based on the political ad spending.  Importantly, management also noted that after accounting for the displacement of core non-political advertising, traditional ad spending has modestly strengthened and is approaching flat in the fourth quarter and early 2019.

NXST and its peer local TV broadcasters offer massive free cash flow that creates optionality to shareholder value creation via dividend increases, share buybacks, debt pay down, and accretive M&A as the industry continues to rapidly consolidate.  Against this bullish valuation argument, bears point to poor TV ratings, weak non-political ad sales, loss of subscribers as households cut the cord, and a shift in industry economics in favor the major TV networks (ABC, CBS, FOX, NBC) that supply the bulk of programming seen on local TV stations.

We have followed this industry for a long-time and believe and NXST is the industry leader with the best management on an operating and strategic basis.  We have great confidence that shareholder friendly actions are coming as the company makes decisions about using its free cash flow.

We expect NXST is looking at several large broadcasters that are currently for sale, including Tribune and Cox.  Either of these acquisitions is highly accretive to free cash flow.  There will be some worry about adding a lot of debt to the balance sheet but we believe a large transaction is doable.  Management is disciplined about M&A and has publicly declared many times that they know how cheap their own stock is and the high hurdle rate it creates for any other use of free cash flow.

NXST shares have held up well in the current market correction.  We see upside to the mid $90s for an additional gain of 15-20% assuming the economy holds together, which is our current view.  We base this target on average 2018/19 free cash flow per share of $13.40 with further growth in 2019/20 to nearly $14.00.  Using a 15% free cash flow yield gets us to $89-93.  We believe the company deserves credit for the likelihood of a big acquisition that could bump the free cash flow estimates up another 20%.  Given strong management, free cash flow, and valuation, Northlake maintains will continue to be an investor in NXST.

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.