Local Digital Shifts Will Expand Media Reach Despite Risks

Key Takeaways

• Dominance in local markets, strategic M&A, and innovation in content and digital platforms are expected to drive outsized revenue growth and expanding margins.
  
• Underutilized spectrum assets and leadership in advanced distribution technologies provide strong optional upside for future high-margin, non-advertising revenue streams.
  
• Structural revenue pressures from cord-cutting, declining retransmission fees, high leverage, and digital ad migration threaten the stability and long-term profitability of Gray Media's core business.

Catalysts

A multimedia company, owns and/or operates television stations and digital assets in the United States.

• Analysts broadly agree that recent M&A, particularly the creation of 11 new Big 4 duopolies and entry into 6 additional markets, will be cash flow accretive, but this understates the long-term potential: Gray is poised not only for immediate cash gains but also for substantial pricing power and recurring top-line revenue growth as these high-performing, #1-ranked local stations increasingly dominate their respective markets.
  
• While consensus expects digital and sports content to boost ad revenues, early data from nearly 80% sports coverage across Gray's footprint, coupled with a unique Atlanta independent strategy and robust local content production, suggests Gray could capture far higher market share in local and political advertising than peers anticipate, translating to materially higher margins and outsized revenue growth, especially in the political super-cycles ahead.
  
• Gray's expansion into digital and CTV, combined with its trusted local news brand and multi-platform content distribution, positions it to capitalize on the accelerating shift of small and regional advertisers migrating from national tech platforms, driving durable digital revenue growth and expanding EBITDA margins well beyond legacy broadcasting levels.
  
• The company's demonstrated ability to rapidly integrate and extract synergies from tuck-in acquisitions-evidenced by swift deleveraging with each transaction-positions Gray for a virtuous cycle of M&A and organic growth that could compound free cash flow at an unprecedented rate in the industry.
  
• Gray's spectrum assets and leadership in local content innovation create significant, underappreciated optionality for future high-margin, non-advertising revenue streams (such as spectrum monetization or advanced ATSC 3.0 services), which could drive structurally higher long-term earnings power as the industry shifts toward new distribution technologies.

Gray Media Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Gray Media compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Gray Media's revenue will decrease by 3.5% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Gray Media will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Gray Media's profit margin will increase from 4.2% to the average US Media industry of 9.9% in 3 years.
• If Gray Media's profit margin were to converge on the industry average, you could expect earnings to reach $316.5 million (and earnings per share of $3.13) by about August 2028, up from $148.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 4.1x on those 2028 earnings, up from 3.9x today. This future PE is lower than the current PE for the US Media industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Gray Media Future Earnings Per Share Growth

Risks

• The persistent decline in traditional TV viewership due to cord-cutting and the shift to streaming and OTT platforms is likely to erode Gray Media's advertising revenue and limit long-term top-line growth as audiences migrate away from core broadcast channels.
  
• Heavy reliance on retransmission consent fees is a structural risk, as accelerating declines in pay-TV subscriptions are already leading to significant sequential drops in retrans and network affiliate revenues, which jeopardizes a key cash flow and earnings driver for the company.
  
• Gray Media's high leverage remains a structural vulnerability, with total debt at 5.6 times EBITDA and the need for recurring refinancing, making the company sensitive to high interest rates and any potential softness in revenue, which could pressure net margins and increase the risk of financial distress.
  
• The transition of the Atlanta station (WANF) from a CBS affiliate to an independent increases dependence on local advertising, which is more cyclical and exposed to secular declines in local TV ad spend, and this loss of network affiliation may reduce stable affiliate fees, potentially impacting recurring revenue and creating increased earnings volatility.
  
• Long-term advertising trends, including the shift of marketer budgets toward digital and performance-driven channels and advancements in targeted, programmatic advertising that favor digital-first platforms over linear broadcasters, threaten the competitiveness and profitability of Gray Media's core business, potentially resulting in pressure on ad rates, margin contraction, and declining revenue over time.

Valuation

• The assumed bullish price target for Gray Media is $9.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Gray Media's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $316.5 million, and it would be trading on a PE ratio of 4.1x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $6.0, the bullish analyst price target of $9.0 is 33.3% 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.