Investment Thesis
Following a 17 percent increase from the lows of May 3, 2021, Gray Television, Inc. (NYSE:GTN) attracted significant investor interest. GTN agreed to buy Quincy Media Inc. and Meredith Corporation (MDP), significantly benefiting the company by expanding its market reach and digital presence in the US. As a result, the successful acquisition of the aforementioned companies will lead GTN to becoming the second-largest television broadcaster.
Overview
Gray Television, headquartered in Atlanta, is the largest owner of top-rated local television stations and digital assets in the United States. GTN entered into an agreement on January 31, 2021, to acquire all outstanding shares of Quincy Media, Inc. for $925 million in cash. GTN will own television stations serving 102 television markets that collectively reach 25.4 percent of US television households. This includes the number-one ranked television station in 77 markets and the first and second-highest ranked television station in 93 markets Comscore's average all-day ratings for the calendar year 2020. GTN announced on April 29, 2021 that they had reached an agreement with Allen Media Broadcasting, LLC to divest Quincy's television stations in the seven markets. GTN anticipates to settle everything, including legal aspects, in the third quarter of 2021. Gray also owns video program production, marketing, and digital businesses, including Raycom Sports, Tupelo Honey, and RTM Studios, the producer of PowerNation programs and content, and is the majority owner of Swirl Films.
While 2020 was an excellent year for broadcast, there was also a significant increase at around 6 million households in the United States that use cord-cutter households (those without pay-TV). Additionally, eMarketer estimates that by 2024, the number of cord-cutter households will increase to 46.6 million, resulting in a significant decrease toward pay-TV. Such plans of acquisition become more logical to make GTN stay up to date for the fast-changing trend in the broadcasting industry.
Another Major Acquisition: Making GTN Number 2
On May 3, 2021, GTN secured a deal to acquire 100% ownership of Meredith Corporation television station assets. MDP is a well-diversified player in the media business. It has a vast footprint that reaches 190 million American consumers. MDP provides magazines and has a digital presence around 50 websites. MDP is also known for its Local Media, which consists of 17 television stations:
seven CBS affiliates
five FOX affiliates
two MyNetworkTV affiliates
one NBC affiliate
one ABC affiliate
two independent stations
The deal will cost GTN $14.50/share payable in cash. GTN will become the second-largest television broadcaster in the US, with combined net revenue exceeding $3.1 billion as a result of the two purchase agreements.
Financial Performance
Nexstar Media Group, Inc. (NXST), Sinclair Broadcast Group, Inc. (SBGI), TEGNA Inc.(TGNA)
GTN's preliminary Q1 report is not as strong as I had anticipated. A $10 million increase in revenue, representing a 2% quarter-over-quarter increase. This constitutes revenue from national broadcast advertising of $260 million, political advertising of $9 million, and retransmission consent revenue of $247 million. Ending the first quarter with a bottom line of $39 million, down 36% from the same quarter last year; this is because of a decrease in operating income of $153 million, or 9% less than the first quarter of 2020, and an increase in OPEX of 8%. In comparison to its peers, GTN has the least efficient gross margin, but injecting significant two acquisitions will undoubtedly improve its performance due to their improved market scope.
Valuation and Its Peers
Using the EV/EBITDA multiple to determine whether a stock is undervalued or not, GTN was found to be undervalued when compared to its peers, which trade at a 6.12x EV/EBITDA multiple. However, when compared to its forward EV/EBITDA, it appears that GTN is having trouble maintaining a sustainable operating income, projecting into the future.
I will be more excited to see a shift in result here after injecting the said acquisitions. Below, I prepared a summary of my fair price on GTN:
Schedule:
My DCF model began with a conservative $3.0 billion revenue, $100 million lower than estimated blended revenue of $3.1 billion, and forecasted it to end with a conservative revenue of $3.6 billion in the fifth year, 29% lower than peers' five-year projections. I modeled declining revenue growth as a result of GTN's historical inefficiencies. I expect GTN's operating income and accrued income tax expense to grow to 28.6% and 28.7%, respectively. Additionally, I assume it will continue to invest in its core working capital and expand its fixed assets by 0.6% and 2.5% YoY, respectively, throughout the model.
I projected the terminal value of GTN using a conservative perpetual growth and implied fair EV/EBITDA multiple of 2.5% and 11.39x, respectively. Then, using the weighted average cost of capital of 7.18% as my discount rate. Additionally, BV Debt - Interest Bearing is calculated as the average of long-term capital leases and long-term debt. However, when calculating the enterprise value, I use total debt to arrive at a conservative estimate of $79.5 fair price and the best price of $39.7 per share.
Final Thoughts and Caveat
Source: TradingView
GTN broke a significant daily trend-line supported with a significant volume breakout of 3.09 million. Waiting for a pullback can be an excellent investing strategy too, I plotted three discounted prices tagged as Key Levels. GTN poses a risk due to its forward EV/EBITDA and forward P/E ratios being higher than its trailing counterpart, as well as the rapidly changing consumer behavior regarding television use in general. Looking forward, I see potential in GTN after the actual operations materialize in its expansion, and I am expecting an improvement of its core operation and its free cash flow. GTN is trading at 5.7x below peers’ mean of 7.6x P/E ratio, an undervalued stock with a potential of 73 percent upside. GTN is a stock to keep an eye on.
