Sports Broadcasting Deals And Political Ads Fuel Revenue Surge Amid Operational Efficiencies

Key Takeaways

• Expansion into sports broadcasting and growth in political advertising revenue are expected to significantly enhance ad revenue.
  
• Strong focus on returning value to shareholders through dividends and share repurchases, underpinned by solid free cash flow.
  
• Nexstar's future earnings could fluctuate due to competition for ad dollars, subscriber losses, reliance on cyclical political ads, and risks from investing in The CW network.

Catalysts

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

• Expansion into sports broadcasting, including deals with NBA and partnerships for broadcasting Pac-12 Football and other sports, is expected to enhance ad revenue due to the high viewership and advertiser demand for live sports content.
  
• Growth in political advertising revenue, significantly ahead of projections and expected to increase further as the election approaches, which will positively impact the company's overall advertising revenue.
  
• Reduction in operational costs and programming expenses, particularly through improvements at The CW, where operating losses have significantly reduced, thereby improving net margins.
  
• Efforts to increase distribution revenue through contract renewals on favorable terms, growth in vMVPD subscribers, and addition of CW affiliations, expected to counterbalance MVPD subscriber attrition and boost overall revenue.
  
• Strong focus on returning value to shareholders through dividends and share repurchases, supported by solid free cash flow generation, aiming to positively impact earnings per share and shareholder equity.

Assumptions

• Analysts are assuming Nexstar Media Group's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $739.8 million (and earnings per share of $25.85) by about August 2027, up from $432.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $924 million in earnings, and the most bearish expecting $665.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2027 earnings, down from 12.6x today. This future PE is lower than the current PE for the US Media industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 8.05% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.29%, as per the Simply Wall St company report.

Risks

• The intense competition for national advertising dollars poses a risk to Nexstar's future revenue growth, especially given the dynamic nature of the advertising market and the apparent decline in nonpolitical advertising revenue.
  
• Despite strong current performance, ongoing subscriber attrition in the pay-TV industry could threaten future distribution revenue and impact net margins, reflecting broader trends away from traditional cable subscriptions.
  
• The reliance on political advertising for revenue growth, which is inherently cyclical and can be highly variable, may lead to fluctuations in earnings, particularly in non-election years.
  
• Investments in turning around The CW network, while showing progress, involve significant financial and operational risks that could affect net earnings if the anticipated improvements in operating loss and programming costs do not materialize as expected.
  
• The challenging advertising market, evidenced by the reduction in nonpolitical advertising and the volatile nature of national advertising, could continue to impact overall advertising revenue, especially if economic conditions lead to reduced discretionary spending among advertisers.

Valuation

• The analysts have a consensus price target of $198.0 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 $170.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.4 billion, earnings will come to $739.8 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $169.33, the analyst's price target of $198.0 is 14.5% higher.
  
• 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.