Nexstar Media Group (NXST) reported better than expected results in 2Q20 across revenue, EBITDA, and FCF.  The stock initially rallied sharply as would be expected but other traditional media companies that reported over the past 24 hours had lesser results and that eventually caught up with NXST and the shares traded down -4% which amazingly was better than most media stocks on Wednesday.

NXST faced tough conditions due to the pandemic’s impact on the economy.  Advertisers are quick to cut back spending when recession hits and this was exacerbated by certain categories like hospitality, restaurants, and retail that had to shut down.  Sports are also important to TV advertising, so the lack of games in the second quarter meant lost advertising.  Advertising represents about 50% of NXST’s revenue and sports represents about 10% of advertising.  Core advertising at NXST fell -35% in the quarter with the rate of decline improving each month and through July.  Core advertising actually handily beat more bearish consensus estimates.  Political advertising was a bright spot and is expected to accelerate sharply starting in September.

The other half of NXST’s revenue is subscription fees paid by cable, satellite, and online services for the rights to show NXST’s TV stations in 114 cities across the country.  This revenue line grew 29% in the quarter and is running ahead of budget in 2020.  NXST has to pass through about half of these fees to the owners of the ABC, CBS, FOX, and NBC networks since they provide most of the valuable programming other than locally produced news.  On a net basis, these retransmission fess continue to grow steadily and should do so through at least 2022 based on multiyear contracts currently in place.

The growth in net retransmission fees that represent half of revenue is a key attraction to NXST as it drives steady growth in free cash flow that is used to pay down the debt used to acquire Tribune, increase dividends and buyback stock.  One risk to NXST and what tripped up the stock today is concern about cord cutting leading to fewer subscribers paying these fees.  While NXST’s subscriber counts were on budget in the June quarter, other large media companies saw worsening trends including Sinclair Broadcast Group and 21^st Century Fox.

We are very confident in NXST’s outlook for cash flow due to the contracts in place, upcoming political advertising, and what believe is the best management team in the TV station business.  We expect NXST to be able to begin repurchasing stock in September as debt levels come down to target.  The company has little else to do with its free cash flow which equals about 25% of the stock’s capitalization.  Current regulations rule out further acquisitions.  Thus, even if the risk from subscriber declines and cyclical core advertising stay elevated, the share price is easily supported by buybacks and dividends.  Using a below average EBITDA multiple, we see NXST as conservatively valued at $100, about 16% above the current stock price.  Should the economic recovery proceed and investor confidence improves, NXST can return to its historical multiple which offers upside to $125. 

We understand the risks in a cyclical and secularly challenged industry but that also offers upside.  Northlake owns a lot of growth stocks including Apple, Alphabet, Facebook, and Home Depot.  Having some exposure to a value stock like NXST is a nice diversification strategy with downside protected by free cash flow.

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.