Description

Overview: Nexstar (NXST) is the largest TV broadcast affiliate, the leader in a complex and dynamic "old media" sector.  For a near-comprehensive overview of this sector, see previous write-ups HERE and HERE.  Historically and during the GFC, almost all of broadcasters' revenue was driven by highly cyclical advertising sales.  However, over the past decade, the growth of retrans (both MVPD and OTT) has led to >50% of EBITDA derived from contracted, growing subscription fees.  Political has also continued to grow rapidly, and it can comprise 15-20% of EBITDA in a political year (like 2020).  Core will only be ~1/3 of EBITDA in 2020.  

Advertising: Core advertising is going to be down ~40% in March and April, following a solid Jan/Feb start to the year.  The rebound will not be immediate, but trends should improve throughout the year.  In the GFC, core troughed at -15% (annual).  Applying a 10-15% haircut to 2020-21 average core, appears to be an appropriate base case at this time.  

Retrans/Political: Given increased consumer media engagement, and the fact that NXST is agnostic to cord-cutters going to (most) OTT offerings, retrans should remain stable and growing yoy.  Political too is unlikely to be materially impacted by covid.  

Valuation: As such, the all-in revenue hit on an avg 2020-21 basis is likely to be <10%, and EBITDA <15%.  This equates to a FCF yield of ~30% for 2020-21 average (low/mid-30% for 2020 given the political cycle) and <7x EBITDA.

Credit: NXST has a solid balance sheet, with an undrawn revolver and plenty of cash.  They prepaid much of their TLA in 1Q, and the only covenant is a 4.25x first lien leverage covenant (vs <3x currently).  NXSTs debt trades in the mid/high-90s (6.5-7% yield on unsecured bonds).  Their first funded maturity isn't until Sept 2024. 

Comparables: With lower leverage, greater scale, and better mgmt, NXST has a favorable risk/return profile versus other pure-plays (GTN/TGNA/SSP).  SBGI has again committed a strategic gaffe with the untimely (and not just because of covid) acquisition of the Fox RSNs, and I see it as uninvestable (unless mgmt eventually dumps the RSNs and commits to an aggressive capital return strategy). 

Capital Allocation: I expect NXST to maintain its dividend, while balancing capital priorities between deleveraging and opportunistic share repurchases. 

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.   

Catalyst

Improved fundamental trends over the next 12-18 months.

Deleveraging through FCF generation.

Capital returns.