A Gray Television studio set.
Courtesy of Gray TelevisionA popular media narrative these days is that broadcast TV is being canceled. Yes, the networks keep pumping out shows while audiences congregate for live sports, local news, and special events like the Super Bowl. But viewership is shifting to streaming platforms, splintering audiences and ad dollars. For people under 20 who have never even seen a cable box, the concept of must-see TV might be as quaint as a rerun of Seinfeld—now streaming on Netflix, ad-free.
Broadcast TV stocks trade as if the future will be all digital. Nexstar Media Group (ticker: NXST), the country’s largest station owner, goes for six times estimated 2022 earnings. Netflix (NFLX), by contrast, fetches 49 times.
TV broadcasters may never shake their Old Media shackles, but local TV is far from dead. The broadcasters still generate lots of free cash flow from advertising and distribution fees paid by cable, satellite, and internet services, including some of the new ad-supported apps from the major networks.
Gray Television (GTN), at about $23.50 a share, has a price/earnings ratio of five based on 2022 estimates. It looks like an inexpensive way to bet on broadcast soldiering on. The Atlanta-based company has been scooping up stations for years. It paid $3.7 billion for Raycom Media in 2019, added Quincy Media for $925 million this year, and aims to buy 17 stations from Meredith (MDP) for $2.8 billion, pending regulatory approvals. Assuming the deal closes as expected in December, Gray will reach 36% of U.S. households and operate in 113 markets, making it the second-largest local TV group.
The scale confers benefits. One is that Gray can sell more ads in markets where it carries at least two of the Big Four networks: ABC, NBC, CBS, and Fox. CBS audiences, for example, skew older, while Fox appeals to younger viewers, enabling Gray to sell ads against both demographics in various markets. It will be in 40 markets with more than one of the Big Four once the Meredith deal closes.
Gray’s strength in local news helps it make a killing in political ads. Including Meredith, the company will operate 79 stations with the highest ratings in their markets—appealing to politicians looking for the biggest bang for their money.
Gray brings in more political-ad dollars per household than any other station group. Many of its stations are in battleground states, including nine of the 10 markets expected to have the most competitive Senate races next year. Political ads brought in $473 million in the 2020 cycle, or 20% of Gray’s total revenue, and 2022 should be a strong midterm year.
“We think it’s going to be extremely bullish for political advertising, and we’ll take a larger share than almost any company in the country,” Gray CEO Hilton Howell tells Barron’s.
Gray Television (GTN / NYSE)
TV Station Owner
| Headquarters | Atlanta |
|---|---|
| Recent Price: | $23.50 |
| YTD Change | 32% |
| Market Value (bil): | $2.2 |
| 2022E Sales (bil) | $3.0 |
| 2022E Ebitda* (bil) | $1.1 |
| 2022E EPS: | $4.38 |
| 2022E P/E: | 5.3 |
| Dividend Yield: | 1.4% |
E=estimate. *Earnings before interest, taxes, depreciation, and amortization
Source: FactSet
Local advertising bumps along with the economy, and it hasn’t been great lately. Ads from auto dealers have fallen sharply, depressing Gray’s overall ad sales. “Auto has a ways to go before it’s fully recovered,” says Howell. Gray is having some success in other areas, though, seeing gains in legal services and tourism. Sports gambling is emerging as a fast-growing category.
While advertising recovers, Gray should keep raking in distribution fees from cable, satellite, and digital platforms like streaming. “Retransmission” fees brought in a net $371 million, or 36% of Gray’s total revenue, in 2020 and are on track for at least $400 million this year. The fees are based partly on cable subscriptions, which have been falling as audiences shift to streaming. But it’s still a big pot, rising from just $20 million in 2011.
Cable subscription losses may be stabilizing after years of declines. Local broadcasters receive ad revenue when their signals are distributed on platforms like YouTube, FuboTV, and Hulu, and streaming services from networks such as CBS and NBC.
Wall Street expects Gray to earn $4.38 a share next year, up from $1.68 this year, due largely to a surge in political ads. Earnings will then fall to $2.17 a share in 2023 and jump to $5.93 in 2024, another big election year. The inconsistency renders the stock tough to value on 12-month estimates.
Gray’s acquisitions have ramped up its debt, which is expected to hit $7.3 billion with the Meredith deal. Indeed, much of Gray’s estimated $8.4 billion in enterprise value (equity plus debt, less cash) consists of debt—an overhang on the stock, especially if interest rates rise.
Nonetheless, Benchmark analyst Daniel Kurnos sees the shares hitting $32 over the next year, up more than 35%. He figures Gray will take in an average of $1.2 billion in earnings before interest, taxes, depreciation, and amortization, or Ebitda, over 2021 and 2022. At $32, the stock would trade close to eight times enterprise value to Ebitda, above the industry average of about seven. Yet TV stations in prime markets are selling at multiples of 10, Kurnos points out.
“Wall Street thinks TV is dying, but that’s not the case,” he says.
Brian Lund, a portfolio manager at ClearBridge Investments, likes the stock. “They have a lot of debt, but they cash-flow like crazy, and the assets are salable,” he says. What’s more, he adds, the industry is consolidating, and Gray would probably find a buyer willing to pay a premium if it sells.
Even if the old-fashioned way of watching TV keeps dying.
Write to Daren Fonda at daren.fonda@barrons.com
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TV Isn’t Dying, and This Broadcaster’s Stock Is Underpriced - Barron's
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