Nexstar: Solid Upside In Growing Broadcast Name

| About: Nexstar Media (NXST)
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Nexstar Broadcasting Group (NASDAQ:NXST) is an intriguing small-cap broadcast name that has a lot of potential as the company projects to see strong growth from acquisitions and is interesting as well with its growing spectrum value. The company is a high-growth name with solid valuation along with very strong potential spectrum valuation that could be the key to this stock taking off further from these levels.

Recent Developments/Catalyst

First, let's take note of the company's solid scoring in Growth and Profitability valuation sections as well as their appealing value indicators. NXST is expected to grow through a very strong cycle of growth as they have added about 37 TV stations since the beginning of 2012, which increased their repertoire from 54 stations to 91. The company's most recent acquisition of CCA and White Knight Broadcasting stations adds another 19 to the mix. The company estimates that it will add $1 per share in FCF by 2014, and it's a big part of the company's future success. That deal should be completed this year and will help the company push forth another large growth cycle in 2014. The company, for example, expects pro forma FCF of $300M in the 2014-2015 area. The company had around $50M in FCF in 2012, so we can see what kind of expansion the company is seeing.

At the same time, the stock has risen 40% in the past year, so the question is can shares continue higher? Current value indicators are mixed. The company has a P/E at 6.2, price/sales at 2.3, price/OCF at 20.2, and PEG at 3.1. The company is cheap in comparison to earnings, sales, and even OCF. Overall, the stock has pretty decent value overall with strong growth expectations as well as solid profitability. That combination is very enticing to us.

Currently, we believe that the company is worth around $47/share. The prospects for the company are mixed when we look at the company without its spectrum value. On the plus side, the company is acquiring a lot of names, has pretty strong profitability, but the company does have very high debt levels, which is the issue for the company moving forward. The focus of the business for NXST is a combination of acquisitions along with diversifying their business line to grow retransmission, digital media, and eMedia. eMedia is the company's local website portals that correspond with their stations, while digital is their growing mobile/tablet revenue. In 2011, those divisions accounted for 17% of revenue, while it accounted for 26% in the latest quarter.

Nexstar is, additionally, seeing a cyclically weak year due to low advertising from political advertisements as well as Olympic revenue. Without politics, the company still saw 42% growth in sales year/year due to acquisitions mostly. The company, additionally, will be seeing a strong cyclical level of growth from politics for mid-term elections. We like a lot of the momentum moving forward for NXST. Another positive is that the company is creating duopolies in many markets through acquisitions. With over 90 TV stations, the company is expected to have about 33 duopolies. A duopoly is where NXST owns the two prime TV stations in one market. In duopolies, the company has found that they can improve margins by 500-700 points in those areas over just regular markets. With its CCA/White Knight acquisition, the company will add seven new duopolies.

Some issues that we see for NXST moving forward, though, are growth of internet viewership of TV with Netflix and Hulu, growth of video on demand, online internet news growth, switching for advertisers from broadcast TV to cable TV, and Aereo. Yet, the most major risk is the company's high debt levels. They have $1B in debt right now, which means that they have very high levels of interest payments have to occur every quarter. As we noted in our SBGI article, one interesting statistic to show this trend is that since 2007 all local news has been on the decline. In 2007, 28M people watched late and 25M watched early evening news. Now, that number has dropped to just under 26M and just over 22M. Additionally, cable television has grown in popularity over the past five years with better content.

Inventions like DVR threaten ad revenue for broadcast television. DVR, Hopper, and other devices allow individuals to record shows and then skip commercials. The long-term trajectory of broadcast TV's ability to negotiate strong ad revenue is definitely a concern for the company, but we see their acquisition growth as helping them make tremendous strides through 2015. After that point, growth may slow without more acquisition growth.

The key, though, is that even with these risks, NXST is a very cheap company with a lot of potential upside. Further, the company is expected to generate $300M in FCF by 2015, which will allow them to raise dividends, increase share buybacks, and acquire new companies without taking on more debt. We believe this is the key to the company's success moving forward, and that they can increase valuations significantly as their FCF starts to take shape. The company's net leverage has dropped to 4.75x. What that means is that the company has a much better amount of cash to debt, and that they are reducing that debt leverage.

The company, additionally, is extremely cheap when we look at their spectrum value. Broadcast companies are awarded spectrum from the government, which gives them the ability to broadcast to the public. There is only so much airspace, and it has value. TV spectrum is also wanted by online providers as well. Wells Fargo has valued spectrum for Sinclair (NASDAQ:SBGI) at over 25% greater than their market cap and Belo (NYSE:BLC) spectrum value at 23% greater than their market cap. SBGI owns 147 stations and BLC owns 20 stations.

From our SBGI article:

Next year, the government is looking to potentially put spectrum up for auction and allow companies like SBGI to sell spectrum on an open auction. That auction could provide lots of potential earnings for the companies. They did not pay for the spectrum and the government would take a cut of the spectrum, but the potential there is large. The company's spectrum, additionally, will only grow in value over time. As more and more players come into the game, some will be stopped by the fact that they do not have access to spectrum. The company could see a large amount of unaccounted for earnings come about in 2014 if they decide to auction some off, and that is on top of a cyclically strong political year.

As we can see, NXST has a lot going for them. The company has solid value, great growth potential, spectrum value, and a lot to give them more upside. In our model, we have priced the company for around 20-25% growth in the next two years. We then will start to see a slowdown in 2015-2017. The company, additionally, will see strong increases in depreciation and should see a drop in capital expenditures as they limit acquisitions in 2014-2015 compared to 2012-2013.

Price Target Analysis

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

126

155

190

200

205

Taxes

38

47

57

60

62

Depreciation

60

66

75

80

85

Capital Expendit.

-25

-28

-15

-18

-25

Working Capital

10

10

10

10

10

Available Cash Flow

113

137

183

192

194

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for NXST: 10.0%

2013

2014

2015

2016

2017

PV Factor of WACC

0.9091

0.8264

0.7513

0.6830

*

PV of Available Cash Flow

102

113

137

131

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for NXST: 7.0%

2017

Available Cash Flow

193.5

Divided by Cap Rate

7.0%

Residual Value

2764

Multiply by 20167PV Factor

0.6830

PV of Residual Value

1888

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

484

PV of Residual Value

1888

Cash/Cash Equivalents

46

Interest Bearing Debt

994

Equity Value

1424

Step 5.

Divide equity value by shares outstanding:

Equity Value

1424

Shares Outstanding

30.00

Price Target

$47

Price Target Analysis

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

126

155

190

200

205

Taxes

38

47

57

60

62

Depreciation

60

66

75

80

85

Capital Expendit.

-25

-28

-15

-18

-25

Working Capital

10

10

10

10

10

Available Cash Flow

113

137

183

192

194

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for NXST: 10.0%

2013

2014

2015

2016

2017

PV Factor of WACC

0.9091

0.8264

0.7513

0.6830

*

PV of Available Cash Flow

102

113

137

131

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for NXST: 7.0%

2017

Available Cash Flow

193.5

Divided by Cap Rate

7.0%

Residual Value

2764

Multiply by 20167PV Factor

0.6830

PV of Residual Value

1888

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

484

PV of Residual Value

1888

Cash/Cash Equivalents

46

Interest Bearing Debt

994

Equity Value

1424

Step 5.

Divide equity value by shares outstanding:

Equity Value

1424

Shares Outstanding

30.00

Price Target

$47

Conclusion

Despite 400% growth, NXST has a lot of potential. It will increase dividends, increase in value, and has strong profits. Overall, things look very solid moving forward for NXST. The company has over 20% potential upside, and we believe as the deal with CCA closes, shares will get a strong catalyst.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.