Description

Important Disclosures: Certain funds and accounts managed by us and our affiliates are currently long Nexstar Media Group (NXST).  We may buy and/or sell shares of NXST in the future for the funds and accounts managed by us without notice, and we are under no obligation or agreement to take, or not take, any action or restrict our actions in any manner.  This is not a recommendation to buy or sell shares. Our views are subject to change without notice and we may trade in any manner, whether consistent or inconsistent with this investment thesis.  The information below is from public sources. We have not independently verified this information and we make no representations as to the accuracy or correctness of any such information. We undertake no obligation to update any information below.

Business Description

Nexstar Media Group (NXST) is the second largest broadcast group in terms of U.S. television household reach. As of the end of 2017, the company owned, operated, programmed, or provided services to 170 full power television stations in approximately 100 domestic markets across 40 states. The company’s broadcast properties reach 26% of American households1.  82% of the company’s stations affiliate with the major networks – CBS, NBC, ABC, and FOX. These agreements give NXST the exclusive rights to primetime content within the markets they serve. Nexstar produces and delivers nearly 4,000 hours of weekly local news and content, with top-two revenue share in a majority of their markets.

Nexstar Broadcast Properties

Source: NXST Mgmt Presentation

Monetization

Nexstar principally derives revenues from three sources: retransmission, advertising, and digital. Retransmission revenues represent the payments made by multichannel video programming distributor (MVPD) partners (Comcast, Charter) to Nexstar for carriage of Nexstar content. Nexstar then remits a portion of these proceeds (~50%) to their affiliates (CBS, NBC) and retains the net retransmission proceeds. The second major bucket of revenues is derived from advertising. Nexstar skews roughly 2-to-1 in terms of local advertising versus national advertising. In even years, the company’s advertising revenues generally gets a boost from political advertising. Presidential Election years tend to provide the largest bump to advertising revenues. The third major source of revenue is the digital media business, which provides digital publishing, content management, and advertising solutions to mainly local media publishers and advertisers.

Nexstar 2017 Revenue Mix

Source: NXST Mgmt Presentation

Thesis

1) Retransmission growth
As per management, Nexstar’s channels receive approximately 35% of aggregate viewership hours across MVPD platforms, yet only represent 12-15% of overall retransmission revenues from these platforms. We believe that this under-monetization is in the process of being fixed, with a repricing of nearly 100% of the company’s subscriber base over the next three years. If successful, this could drive double-digit revenue growth with high visibility for the next several years. And even in the event of cord cutting, Nexstar’s offerings have been included in nearly all over-the-top content (OTT) bundles at similar economics to those of the MVPDs.

2) Advertising resilience
Despite widespread fears about the demise of traditional pay TV and the associated impact to advertising revenues, Nexstar’s advertising business has held up well. Core revenue trends on the advertising side have been relatively stable, underpinned by stronger local advertising offsetting slightly weaker national advertising revenues. According to Nielsen, local broadcasting remains the most trusted news source in the U.S. and commands the greatest share of average weekly television news viewership, even among millennials. We believe that this viewership will attract advertisers and, as a result, we feel comfortable with management’s outlook for 0-3% annual growth in advertising revenues. We also believe that the current and upcoming political years (2018 and 2020) provide potential incremental upside given the amount of money flowing into elections and the vast number of seats considered to be “in play”.

3) Digital business growing
The digital business, while only representing 10% of overall revenues, provides a strong value-added service to Nexstar’s local affiliates. This business currently is growing at a double-digit pace organically, and if this momentum continues, we believe it has potential to double in size over the next 4 to 5 years. At some point, we believe that management could look to spin or separate this business to unlock shareholder value.

4) Capital allocation
We believe that management’s capital allocation plans in 2018 will mirror those of 2017, with a majority of FCF being used to reduce debt, and a residual amount going towards share repurchase and dividends. If so, we project that by the end of 2018, management could be at their target leverage range (3.7-3.8x). After this point, they would be in a position to either do accretive M&A or significantly accelerate the return of cash to shareholders.

5) Accretive M&A
Nexstar has been built through acquisitions, and the company has proven itself to be an adept acquirer and integrator. Regardless of whether the FCC changes the ownership cap or toys with the UHF discount, we believe there are promising potential acquisitions for Nexstar. The most attractive types are in-market acquisitions, in which the company can leverage its local news content across multiple stations.

6) Significantly undervalued
We believe that Nexstar is currently being valued as though it were heading towards extinction. The company has guided to ~$13 of FCF in 2019 and, given the timing of retransmission deals and a presidential election year, we expect that 2020 FCF should be even higher. This potentially could give the company almost $30 of FCF to deploy to shareholder friendly causes between 2019 and 2020, which represents just under 50% of the company’s current market cap. The stock currently trades approximately at a 20% levered free cash flow yield – looked at in any way, we believe that this valuation represents a staggering disconnect with the company’s outlook.

7) Long-term ATSC 3.0 and spectrum monetization
Beyond the discussion laid out above, we believe the company has additional monetization potential in the 2020s from ATSC 3.0, a new industry broadcasting standard which will allow for targeted advertisements (amongst other things). Nexstar also owns a significant amount of spectrum which can either be sold wholesale or leased out for a variety of uses. We believe that neither of these additional potential sources of monetization is reflected in current valuation.

Please note that all growth, FCF and valuation estimates above are based solely on our subjective analysis and should not be relied upon.  Actual results will vary significantly from these estimates.

Certain Risks

The risks we have identified in connection with an investment in NXST include, among others:

Macro – advertising is a cyclical industry
Accelerated industry cord cutting without adoption of OTT solutions
Significant unforeseen declines in local broadcast ratings

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1 39% without the UHF discount and 26% when including the UHF discount. This is relative to the current national FCC cap of 39% on national TV ownership.

Catalyst

Close of SBGI/TRCO deal
2018 Elections
Accelerated return of capital to shareholders after company hits leverage targets