Deregulation May Open M&A Opportunities, But Revenue Challenges Will Persist

Key Takeaways

• Deregulation and acquisition opportunities are poised to drive Nexstar's revenue and earnings growth substantially.
  
• Transformative initiatives in content, technology, and restructuring are projected to boost profitability and enhance long-term revenue growth.
  
• The decline in nonpolitical advertising and subscriber attrition, along with costly technology transitions, may hinder Nexstar's revenue growth and financial performance.

Catalysts

Operates as a diversified media company that produces and distributes local and national news, sports and entertainment content on the television and digital platforms in the United States.

• Nexstar is poised to benefit from the potential deregulation of broadcast ownership rules, which could enable significant M&A opportunities to drive revenue and earnings growth.
  
• The CW’s transformation with a focus on high-quality entertainment, live events, and sports programming is enhancing advertising revenues, reducing losses, and is expected to achieve profitability by 2026, boosting Nexstar's earnings.
  
• Initiatives related to ATSC 3.0 and the EdgeBeam Wireless consortium present future opportunities for innovative revenue streams through data transmission services, potentially enhancing long-term revenue growth.
  
• Nexstar plans to renew distribution contracts covering 60% of its subscriber base in 2025, which could positively impact their revenue from distribution in 2026.
  
• Continuous operational restructuring is expected to reduce expenses by low to mid-8 figures in 2025, potentially increasing net margins and earnings.

Nexstar Media Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nexstar Media Group's revenue will decrease by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.0% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $566.3 million (and earnings per share of $18.46) by about March 2028, down from $702.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $647.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 7.7x today. This future PE is lower than the current PE for the US Media industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

Nexstar Media Group Future Earnings Per Share Growth

Risks

• The continued decline in nonpolitical advertising revenue due to market softness and other challenges could negatively impact Nexstar's revenue and overall earnings.
  
• Subscriber attrition in pay TV could offset the growth from distribution contract renewals, affecting Nexstar's future distribution revenue and net margins.
  
• The expectation of flat net distribution revenue with ongoing subscriber losses could hinder revenue growth and affect EBITDA, especially given upcoming major renewal negotiations.
  
• The potential for significant expenses in transitioning to ATSC 3.0 and developing related technologies could impact the company's net margins and increase operational costs.
  
• The challenges and uncertainty associated with achieving regulatory relief and ownership rule changes could affect Nexstar's strategic plans and long-term growth, impacting overall financial performance and shareholder value.

Valuation

• The analysts have a consensus price target of $199.465 for Nexstar Media Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $225.0, and the most bearish reporting a price target of just $172.12.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $566.3 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $177.85, the analyst price target of $199.47 is 10.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.