Nexstar Sets the Stage with a $1.5 Billion Additional Share Repurchase – Buyback Wednesdays

Last month after we published a C-suite transitions article about the broadcasting company TEGNA (TGNA), I got a chance to discuss a smaller competitor Entravision Communications (EVC) and the broadcasting segment in general with a professional investor. He had been following a group of broadcasters for a decade and felt that both TEGNA and Nexstar were high quality names in this segment. I did a deep dive into TEGNA and picked it as a spotlight idea for our August 2024 Special Situations Newsletter.

When I noticed that Nexstar had announced a large stock buyback, I was excited at the opportunity to learn more about one of the biggest players in the broadcasting segment.

Companies led by their founders often have an added advantage due to the founders’ deep commitment and long-term vision. Nexstar Media Group (NXST), a major player in the American media landscape, is run by owner-operator CEO Perry Sook. Over the past 25+ years, Mr. Sook has played a pivotal role in transforming Nexstar from a single station into the nation’s largest local television and media company. Under his leadership, Nexstar now controls 200 stations, collectively reaching 39% of television-owning households. This remarkable growth showcases Sook’s strategic acumen, which has been instrumental in driving Nexstar’s expansion and success in the competitive media industry.

Nexstar Media Group, Inc. (NXST): $172.02

Market Cap: $5.65B

EV: $12.43B

Key Insights

• Nexstar is a diversified media company with a strong presence in both local and national broadcasting, as well as a growing digital footprint. 
• The company’s stock price has been almost flat over the last year but has skyrocketed over the last decade, rising by over 280%.
• The business demonstrates cyclicality, with peak performance in even-numbered years due to political advertising.
• Management is committed to buybacks, repurchasing 10% of the float per year, while increasing dividends for 11 consecutive years.
• Management is optimistic that its recently acquired broadcasting network CW, will turn cashflow positive in 2025.
• Revenue associated with distribution in Q1 2024 was at an all time high of $761 million, growing 4.5% YoY.
• Rising political ad spending is expected to significantly boost Nexstar’s revenue and profits in the second half of 2024.

With a team of over 13,000 employees across America, Nexstar produces more than 310,000 hours of news, sports, and entertainment programming a year and plans to expand its local programming over the coming year.

Of its 200 stations, 155 are affiliated with the four national broadcast networks: CBS, Fox, NBC, and ABC. Nexstar’s national television properties include The CW, America’s fifth major broadcast network, NewsNation, its national news network providing “News for All America,” popular entertainment multicast networks Antenna TV and Rewind TV, and a 31.3% ownership stake in TV Food Network. The Company’s portfolio of digital assets includes its local TV station websites, The Hill and NewsNationNow.com.

Business Model

Nexstar generates revenue through two main channels:

• Advertisements (41% of revenue): In election years, Nexstar earns a lot from political advertising, since local TV viewers tend to be consistent voters.
• Distribution Revenue (59% of revenue): Nexstar earns its largest revenue segment by selling content to cable, satellite, Multichannel Video Distributors (MVPDs) and Online Video Distributors (OVDs). This includes retransmission and carriage fees, which are highly profitable and based on subscriber numbers. Additional distribution revenue comes from affiliation fees paid by The CW affiliates and from leasing spectrum to programmers in selected local markets.

Growth Through M&A

Sook’s strategy of acquiring TV stations at low single-digit multiples of free cash flow proved highly successful. In 2017, Nexstar acquired Media General for $4.6 billion, adding 71 stations and elevating Nexstar to the level of Sinclair Broadcast Group, Tribune Media, and Tegna Media. The acquisition was so substantial that Nexstar had to divest 13 stations for $548 million to secure FCC approval.

Source: Author from nextstar.tv

Nexstar’s stock surged ~750% from its 2003 IPO to the 2019 Tribune Media acquisition for $7.2 billion (including debt), making it the largest local television broadcast and digital media company in the nation. Since then, management has rightly shifted focus to growing distribution revenues after a long series of acquisitions.

Cyclical Business

The business demonstrates cyclicality, with peak performance in even-numbered years, influenced by political campaigns and major events. Highest advertising revenue is reported in the second and fourth quarters due to seasonal consumer and retail advertising.

Management

Nexstar’s success can be attributed to its management team with the founder CEO at the helm. The firm’s President and Chief Operating Officer Michael Biard also has extensive experience in media and network distribution. Prior to joining Nexstar in August 2023, Mr. Biard spent 23 years with FOX Corporation (FOX), serving as President of Operations and Distribution. In November last year, the company’s CFO Tom Carter retired and Ms Lee Ann became the new CFO. Interestingly, she had previously worked with Tom Carter at Bank of America.

Valuation

Nexstar is currently undervalued, with a forward P/E of 6.91 and a forward EV/EBITDA of 5.86, both significantly below the sector median and its 5-year average. This low valuation likely stems from market concerns about potential weakness in distribution revenue, apprehensions regarding the recent acquisition of The CW Network, and the persistent belief that local TV is in terminal decline. This undervaluation may be a key factor motivating management to repurchase shares.

Financial Performance

Nexstar has a market cap of $5.81 billion and an enterprise value of $12.58 billion. The company generated nearly $5 billion in revenue for the 12 months ending March 31, 2024. Revenue has skyrocketed from $631.3 million in 2014 to $4.93 billion in 2023, achieving an impressive CAGR of 25.2% over the past decade. During this period, diluted EPS surged from $2 to $11.3. As of the last reported quarter, the company holds $237 million in cash and short-term investments, including $90 million of cash related to the CW. Current liabilities are well covered by current assets, reflecting a strong liquidity position. However, Nexstar has a net debt of $6.5 billion. The company has been actively working to reduce this debt and should continue to prioritize debt reduction. Its LTM leverage was 3.7x and the company expects it to be in the 2s by the end of the year.

Source: Insidearbitrage

Balanced Capital Allocation

Nexstar is a free cash-flow powerhouse. Management has excelled in capital allocation across various strategies, including dividends, buybacks, M&A, and debt repayment. Shareholder returns have generally increased over the years, with a significant emphasis on buybacks recently. Debt repayment has been a consistent priority, averaging $970 million in long-term debt repayment per year over the last decade. Acquisitions have varied, with significant investments in some years, such as the $7.187 billion Tribune acquisition in 2019, and smaller or no acquisitions in others.

Source: Nextstar (Investor Presentation)

In the first quarter of 2024, it used cash on hand and cash flow from operations to repay $30 million of debt, pay $57 million in dividends, and repurchase 666,574 shares of its common stock at an average price of $166.11 for a total of $111 million.

The company thus maintains flexibility in its FCF deployment, adjusting allocations based on strategic needs and opportunities.

Share Repurchase

On July 26, 2024, the Board approved a new share repurchase program authorizing the company to repurchase up to $1.5 billion of its common stock. 

Source: Insidearbitrage

The company actually follows through on buyback announcements, reducing its shares outstanding significantly from 47.6 million in March 2020 to 34 million in March 2024, a 28.5% reduction over four years. 

Dividends

The company has maintained dividend payments for 12 consecutive years and increased them for the last 11 years, achieving a CAGR of 27.4% over the past decade—significantly higher than the sector median. With a payout ratio of 48.56% and a forward dividend yield of 3.82%, there is still room for future increases. In January, the company announced a 25% quarterly dividend hike to $1.69 per share ($6.76 annually), marking the eleventh consecutive annual increase.

Source: Seeking Alpha

Benefiting From Recent Trends

Linear TV continues to have an audience, particularly among Gen X and Baby Boomers, due to its straightforward viewing experience and reliability for news and live events. Local stations are expected to thrive as sports teams seek local coverage, boosting carriage fees. Nexstar benefits as sports franchises provide free antennas for fans, a trend likely to expand. The Super Bowl achieved record revenue thanks to linear TV.

Source: Nexstar Investor Presentation

Core Advertising, which represented 33.7% of net revenue in 2023, may rebound as inflation moderates and advertiser budgets expand. S&P Global Market Intelligence’s Kagan estimates local broadcast TV stations will generate nearly $4 billion in political ad revenue during the 2024 election cycle. Increased cord-cutting has given broadcasters significant leverage in negotiating retransmission fees with cable and satellite providers. This has led to increased retransmission fee revenue, reaching $14.1 billion in 2021, with projections of $15.9 billion by 2027. Nexstar, whose largest revenue source is retransmission fees, is likely to benefit from this trend. 

The ATSC 3.0 Opportunity

• ATSC 3.0, or NextGen TV, enhances viewing with high-definition formats and boosts Nexstar’s monetization of watch time. In the short term, it aims to improve video quality to 4K and 8K and increase viewer interaction through live polls and sports betting for more targeted ads. Long-term applications include GPS, data transmission, and emergency alerts. In Q1, Nexstar reached over 50% of U.S. TV households with an ATSC 3.0 signal after launches in Chicago and San Diego. Nexstar sees ATSC 3.0 as a $5 billion opportunity by 2027, potentially growing to $15 billion by 2030.

Source: Nextstar (Investor Presentation)

Sales and Advertising Initiatives

• Nexstar has transitioned to an in-house sales force for national advertising across all 117 markets and added new advertisers across all platforms in 2023.
• The company is expanding its sports broadcasting content, including bringing the NASCAR XFINITY Series to The CW in 2025. 
• Network development continues with the growth of The CW and NewsNation networks, alongside the expansion of digital platforms and services.
• It entered into multi-year agreements with Comscore and Nielsen for linear and cross-platform audience measurement across Nexstar’s local TV, broadcast, network, and digital businesses.

Competitors

Nexstar’s competitors include TEGNA (TGNA), Sinclair (SBGI), Gray Television (GTN), The E.W. Scrippss Company (SSP),  and Entravision Communications (EVC). Among these, Nexstar stands out as the largest in terms of market cap and number of employees. The following table was put together for our August 2024 newsletter spotlight idea TEGNA and hence the data is about a week old.

Source: Author using Seeking Alpha data

Nexstar has significantly outperformed its peers in recent years. It is the only company in this group that has increased dividends for 11 consecutive years. In terms of profitability, Nexstar ranks second after TEGNA, which has a strong net margin of 19.48%. Nexstar’s gross and net margins are 57% and 8.27%, respectively.

Like Nexstar, TEGNA also executes extensive share repurchases, reducing its outstanding share count by nearly 21% in the last four quarters. 

Nexstar is the largest local broadcaster in the U.S. with revenue 40% greater and a market cap 110% greater than its immediate competitor.

Q1 2024 Results

Nexstar should be analyzed on a rolling 2-year basis due to the cyclical nature of its business, with management providing guidance over the same timeframe. The company showed strong Q1 results, with EPS, Adjusted EBITDA, and adjusted free cash flow exceeding consensus expectations. Q2 results are expected soon.

Risks

• Intense competition from alternative broadcasters, cable networks, and digital media platforms, thus requiring constant innovation and strategic investments.
• The proliferation of viewing options has fragmented audiences, making it harder to attract large, cohesive viewership. This fragmentation can dilute the impact of advertising and reduce overall ad rates, though some improvement is anticipated in the coming months.
• Forward revenue and EPS are estimated to decline in 2025. 
• Integrating newly acquired assets, such as The CW Network, poses challenges. Ensuring smooth integration and realizing expected synergies are critical for Nexstar’s growth strategy.

Bottom Line

Nexstar sees significant opportunities in political advertising and NewsNation, especially with the upcoming election year. The monetization efforts for ATSC 3 are in progress and CW profitability is expected soon. The outlook for distribution revenue remains positive, with the company forecasting growth. It is also focused on paying down its debt. Nexstar is a high-quality business trading at a low valuation, featuring a solid capital allocation strategy, significant share repurchases, a growing dividend, strong margins, an excellent management team, and fantastic assets.

Investors looking for long-term free cash flow growth, regular buybacks and increasing dividend income should take a closer look at Nexstar as an intermediate-term opportunity.

Welcome to edition 92 of Buyback Wednesdays, a monthly series that tracks the top stock buyback announcements during the prior month. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

With a lot of companies announcing their second-quarter results, the number of companies announcing buybacks has picked up, rising from 55 last month to 72 this month.

Top 5 Stock Buyback Announcements 

1. Nexstar Media Group, Inc. (NXST): $172.02

On July 26, 2024, the Board of Directors of this television broadcasting and digital media company announced that it had approved a new $1.5 billion share repurchase program, equal to around 25% of its market cap at announcement.

2. Harley-Davidson, Inc. (HOG): $35.76

On July 4, 2024, the Board of Directors of this motorcycle manufacturer and seller announced that it had approved a new $1 billion stock repurchase agreement. This represents around 20% of its market cap at announcement.

3. Crown Holdings, Inc. (CCK): $85.29

On July 29, 2024, the Board of Directors of this packaging products company announced that it had approved a new $2 billion share repurchase program, equal to around 19% of its market cap at announcement.

4. Affiliated Managers Group, Inc. (AMG): $161.21

On July 29, 2024, the Board of Directors of this investment management company approved an additional share repurchase program of 5.4 million shares of its common stock, equal to around 17% of its market cap at announcement. 

5. Century Communities, Inc.  (CCS): $92.68

 On July 24, 2024, the Board of Directors of this homebuilder authorised an additional share repurchase program of 4.5 million shares of its common stock, equal to around 14% of its market cap at announcement. 

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