Plans To Improve Efficiency With AI May Help, But MVPD Subscriber Declines Could Hurt Earnings

Key Takeaways

• Leveraging technology and AI drives operational savings and efficiency, positively impacting net margins and enabling cost reductions.
  
• Strategic focus on digital revenue growth and potential M&A opportunities positions TEGNA advantageously for future revenue and earnings enhancement.
  
• Reliance on deregulation and M&A, coupled with challenges in advertising and digital transition, could pressure revenue and impact long-term earnings growth.

Catalysts

Operates as a journalism company in the United States.

• TEGNA is focused on building a world-class team and operating system to unlock high-impact execution, which is expected to enhance efficiency and potentially increase net margins.
  
• The company is leveraging technology, automation, and AI to create more efficient operations, leading to operational savings and a positive impact on net margins.
  
• TEGNA is actively working on growing digital revenue by engaging more deeply with its digital audience, correlating to future revenue growth.
  
• The strategic focus on scrutinizing expenses and achieving significant cost reductions is aimed at improving operational efficiency, contributing positively to net income.
  
• Potential regulatory changes and a strong balance sheet position TEGNA advantageously for M&A opportunities, which could create value and positively impact earnings.

TEGNA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TEGNA's revenue will decrease by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.3% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $275.0 million (and earnings per share of $2.24) by about April 2028, down from $597.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.9x on those 2028 earnings, up from 4.3x today. This future PE is lower than the current PE for the US Media industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 5.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

TEGNA Future Earnings Per Share Growth

Risks

• Continued softness from national accounts and political advertising displacement could pressure advertising and marketing services revenue, impacting overall revenue growth.
  
• Subscriber declines in the traditional MVPD sector, despite rate increases, could reduce subscription revenue growth and affect earnings.
  
• Potential challenges in successfully executing a digital transition, in particular Premion's national advertising struggles, could hinder digital revenue growth and impact net margins.
  
• High programming expenses driven by sports rights could reduce net margins if not offset by sufficient revenue from these rights.
  
• Reliance on potential deregulation and M&A opportunities introduces uncertainty. If regulatory or market conditions don't evolve favorably, anticipated synergies and strategic growth may not materialize, impacting long-term earnings growth.

Valuation

• The analysts have a consensus price target of $21.2 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 $23.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $275.0 million, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 8.1%.
• Given the current share price of $15.89, the analyst price target of $21.2 is 25.0% 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.