By:
PJ Cox, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Gray Television, Inc. (NYSE:GTN) operates a portfolio of television
stations that reach 24% of the domestic television market, including larger markets
such as Tampa, Cleveland and Charlotte, as well as smaller markets across the
United States.
• GTN still in the early
stages of Raycom merger, expecting to see increased synergies with continued
integration.
• Launching weekend
political show “Full court press” focusing on how national policy impacts local
communities – commitments to clear the show with ~70% of the country.
• Management recently
overstated Q2 retransmission revenue guidance due to management underestimating
the complexity of the process to combine GTN’s and Raycom’s billing systems, as
well as extended uncertainties of retransmission revenue expenses due to
prolonged contract negotiations with fox.
Key
points:
The firm’s diverse portfolio of television stations
will be it’s biggest asset moving into a presidential election year in
2020. Management stated that it had
experienced stronger demand in 2019 Q2 for political advertisements from
democratic primary contenders, as well as statewide races with key revenues
from Governor’s races in the south.
Additionally, ad agencies have come out with very bullish estimates for
significant increases in political ad spending coming in 2020.
Management is still
anticipating a 20% YoY increase in retransmission revenue despite prolonged contract
negotiations with FOX as well as distributors such as AT&T been in disputes
over fees. It is encouraging that
despite this, retransmission revenue increased quarter over quarter by $37
million, or roughly 23%.
Lastly, one of the key
concerns had been with the firm’s ability to successfully merge with Raycom in
a deal that was finalized earlier this year.
There are a couple key areas the firm’s management has attributed to
integrating Raycom. The first is the
increase in broadcast cash flow being the all-time highest for Q2 increasing
71% YoY as well as improvement in the local advertising business from when the
deal closed in Q1 2019. It is
encouraging to hear management has also raised the realized synergy number from
$80 million to $85 million. The company
will need to rely on these synergies as well as increased operational cash flow
to pay off a leverage ratio of 4.71 times.
What
has the stock done lately?
GTN’s price has slid in
recent months since reaching a near 52-week high in April of $24.50 and has
experienced some volatility lately, with the price being reduced on the news of
the fees dispute and missing on initial retransmission revenue guidance for Q2.
Past
Year Performance:
GTN has increased 12.48% YTD after steeply
dropping to $14.04 in December’s correcting period. This price still remains on the lower side of
its 52-week range of $13.60-$25.31, and I believe is trading at a discount with
a P/E of 9.8x.
Source:
FactSet
My
Takeaway:
Gray Television faced some headwinds resulting from
contract disputes in its retransmission revenue segment, which has been a key
growth driver from the company as retransmission rates have increased over the
course of the past couple years. GTN has
been realize more synergies from its Raycom acquisition as originally forecast
and I believe there is more room for synergy expansion due to the strong
station portfolio and the geographic diversification the acquisition
provided. At a P.E of 9.8x, along with
the potential for an extremely strong political season coming in 2020, I
believe Gray is poised for strong operating performance in 2020 with high
anticipated political advertisements predicted.
Source:
FactSet
