Description

I like Gray over the medium/long term, and there are useful write-ups already on VIC.  This is a shorter term argument, and for us a reason to upsize the prediction even with stock up today.

Gray Television beat expectations on earnings, with political spend for the calendar year to come in ~$100mm higher than their upsized guidance from last month.  Note that ~$200mm of that will hit in the 4th quarter, and all of that is currently received or contracted.  

It currently appears that while David Perdue will be the winner of the Georgia senate election, he is likely to finish slightly below 50% which triggers a runoff.  There is already a runoff in the Georgia special senate election, so that would make two in one state.  The reason that matters is that if the Senate ends up 50/48 before Georgia, and Biden wins, control of the Senate hinges on two elections in Georgia.  It's difficult to conceive of the potential dollars to be spent if that is the case.  The most expensive senate races in recent years have run up to around $200mm, and that's based on speculation of how likely a given race is to flip the senate.  With focused information, the spend could escalate significantly.

We believe Gray is somewhat overexposed to Georgia relative to their national market share.  Though they do not have an Atlanta presence (obviously biggest market), they have top or near top market share in their 4 relevant stations in Savannah, Augusta, Albany and in Columbus, AL. Thus reach is about 25% of the GA TV market or in line with Gray's national presence.

However, we estimate their market share to be outsized in Georgia. Generally a #1 station in a small market enjoys quite a bit more market share than the #1 in a large market where the competition is tougher.  For example, WTOC in Savannah (the largest non-Atlanta market) is #1, running 7 hours of news which is both more than any competitor and quite high for the size of the market. 

Rounded off numbers: We estimate TV still gets just under half of total political ad dollars, Gray nationally gets ~10% of the total political TV spend, and in a place where station mix is particularly good like Georgia they may get >15%. 

It's tough to estimate what may get spent on the campaign, but if Senate control is in focus each race could be among the most expensive in history.  ~$1B was spent on TV ads for Senate races this cycle, with the largest motivator obviously the option to flip the Senate.  If we have a redo with the same stakes, how much gets spent?  Certainly the policy stakes are enormous.  If 1/4 the $1B was spent for 2 races, that's $20mm to Gray.  Political revenue comes at very high incrementals, with no pretax incremental expenses to speak of.

Is that enough to drive the stock?  Unsure of the answer, mathematically it wouldn't be correct to capitalize a special situation like this, but think the market has done that historically to a significant extent.  

Maybe not enough here to make a trade if you aren't already convinced of the underlying fundamentals.  But we like the company given:

1) sensible strategy (#1 markets for vertical scale was the priority, with horizontal scale via acquisition coming later relative to competitors)

2) acquisition opportunity (still have room under the FCC cap unlike some competitors; retrans rates on acquisitions automatically step up to Gray's best-in-industry rates; certain strong family owned stations have been rumoured to be sellers for a while, and they often wait until post-election to sell to take a final dividend payout; Gray recently upsized a debt offering and expects to have $750-1,000mm of cash by year end)

3) capital allocation (overall see as good allocators, won't overpay, has large buyback in place if acquisition opportunities don't materialize and historically has repaid debt).   

So the above is just a nice tailwind.  

Catalyst

clarity about the election, particulary with a Biden win and a 50/48 Senate count ex-Georgia