Octillion Acquisition And Election Ad Boom Fuel Growth, But Economic Uncertainty Looms

Key Takeaways

• Acquiring Octillion to boost TEGNA's CTV platform Premion and strategic alignment in key electoral states is poised to significantly elevate advertising revenues.
  
• Initiatives in sports broadcasting rights expansion and ongoing structural cost reduction efforts are expected to drive viewership growth and improve net margins, respectively.
  
• TEGNA's financial stability is challenged by advertising revenue declines, economic uncertainty, cyclical political ad dependence, and risks from technology investments and acquisitions.

Catalysts

Operates as a media company in the United States.

• The acquisition of Octillion by TEGNA, enhancing the company's CTV platform Premion with cutting-edge technology, is expected to accelerate combined business growth, impacting future revenue growth, particularly in CTV advertising.
  
• TEGNA’s strategic positioning in key electoral states for the upcoming November elections, with anticipated record-spending in presidential and Senate races, is expected to significantly boost political advertising revenue.
  
• Expansion in sports broadcasting rights, like the deals with the NBA, NHL, and local sports teams, leveraging the broadcast network shift for greater reach, can potentially increase viewership and advertising revenue from sports content.
  
• Ongoing business transformation initiatives aimed at structural cost reduction are projected to yield $90 million to $100 million in annualized savings by the end of 2025, thereby likely improving net margins through decreased operational expenses.
  
• The company's aggressive share repurchase program, having returned over $1 billion to shareholders and targeting a return of 40% to 60% of adjusted free cash flow to shareholders through 2024-2025, is designed to support earnings per share (EPS) growth.

Assumptions

• Analysts are assuming TEGNA's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.4% today to 15.3% in 3 years time.
• Analysts expect earnings to reach $472.9 million (and earnings per share of $2.16) by about September 2027, up from $442.1 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 4.4x on those 2027 earnings, down from 5.3x today. This future PE is lower than the current PE for the US Media industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 17.91% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.37%, as per the Simply Wall St company report.

Risks

• The acceleration of subscriber and national advertising declines could reduce overall revenue and impact profitability.
  
• A sluggish and uncertain economy may lead to decreased national ad spend, potentially hindering revenue growth.
  
• Dependence on political advertising, which is inherently cyclical and variable, introduces revenue volatility that could affect financial stability during non-election years.
  
• Investments in technology and acquisitions, like Octillion for Premion, pose execution risks that could impact expected revenue growth and margins if not managed effectively.
  
• The shift towards local advertising over national due to economic headwinds may not fully offset the national decline, posing a risk to overall advertising revenue growth.

Valuation

• The analysts have a consensus price target of $18.1 for TEGNA 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 $21.0, and the most bearish reporting a price target of just $16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.1 billion, earnings will come to $472.9 million, and it would be trading on a PE ratio of 4.4x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $14.05, the analyst's price target of $18.1 is 22.4% 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.