Political Ads Propel Growth Amid Digital Expansion Yet Margins Threatened By Market Shifts

Key Takeaways

• Anticipated strong political ad revenue and double-digit digital sales growth could significantly boost Gray Television's revenues and marginal profits.
  
• Cost savings, debt reduction, and new local sports broadcasts may enhance margins and foster future growth opportunities.
  
• Diverse challenges, including weaker political ad revenues, retransmission risks, shifting viewership, digital competition, and high leverage, threaten Gray Television's financial outlook.

Catalysts

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

• Gray Television anticipates a strong political advertising cycle in 2024, expecting to reach approximately $0.5 billion in political revenue, which could significantly boost overall revenues.
  
• The company is experiencing double-digit growth in digital ad sales, setting new records for monthly digital revenue. This growth in digital platforms could lead to higher marginal revenue, given the lower distribution costs.
  
• Gray Television is realizing substantial cost savings through a significant expense containment initiative launched in August 2024, which is expected to reduce their operating expenses by approximately $60 million annually, positively impacting net margins.
  
• Gray’s focus on repaying debt, with an expectation of reducing total net debt by approximately $500 million in 2024, will lower interest expenses and potentially increase earnings due to reduced financial leverage.
  
• The introduction of local sports broadcasts and multistate distribution ventures represents new revenue streams that could enhance future growth opportunities and improve net margins due to potentially higher ad rates associated with live sports events.

Gray Television Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gray Television's revenue will decrease by -0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.2% today to 1.7% in 3 years time.
• Analysts expect earnings to reach $59.9 million (and earnings per share of $0.45) by about November 2027, down from $145.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2027 earnings, up from 2.8x today. This future PE is greater than the current PE for the US Media industry at 14.4x.
• Analysts expect the number of shares outstanding to grow by 11.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Gray Television Future Earnings Per Share Growth

Risks

• Revenue may be adversely impacted by the lower-than-expected political advertising revenues, which were weaker than anticipated due to fewer competitive races within the company's station footprint.
  
• The increasing sub losses within the retransmission revenue segment present risks to future revenue growth, as these are dependent on factors like subscriber numbers that are beyond the company's control.
  
• Shifts in viewership from SEC to Big Ten sports programming, exacerbated by moves in network affiliations, could lead to reduced core and political ad revenue, affecting overall revenue performance.
  
• The company faces rising competitive pressures from new digital platforms like CTV, which could impact traditional TV ad revenue as advertisers reallocate their budgets.
  
• The high leverage ratio, while being addressed through debt repayment, still poses a risk to net margins and overall financial stability, particularly if economic conditions worsen.

Valuation

• The analysts have a consensus price target of $8.0 for Gray Television 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 $20.0, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.4 billion, earnings will come to $59.9 million, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $4.21, the analyst's price target of $8.0 is 47.4% 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.