Nexstar Media Group, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Nexstar Media Group is a leading television broadcasting and digital media company, operating a large portfolio of television stations, networks, and digital properties across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Nexstar Media Group operates primarily in the television broadcasting and digital media sectors. It is the largest television broadcasting company in the United States, with 200 stations across 117 markets. Here’s a breakdown of their key activities:

  • Television Broadcasting: This constitutes a large portion of Nexstar’s revenue. They own, operate, program and provide sales and other services for local television stations. Revenue in broadcasting is generated from advertising, retransmission fees, and carriage payments for their channels and retransmission of their station’s signals to cable and satellite TV providers.
  • Digital Media: They generate revenue through the operation of various digital properties that are mostly local-area-focused websites for their various stations. This includes digital advertising, subscriber fees for premium content, and syndication.

The company’s business model is highly dependent on advertising revenue, which is directly correlated with economic conditions. They have grown significantly through acquisitions, adding to its scale. But at the same time, have significant levels of debt, which creates a challenge in an era of rising interest rates.

Industry Landscape and Competitive Dynamics:

  • Industry Trends: * The traditional television industry is facing a decline in viewership as people move to streaming and digital content. * Local television still has a place in a fragmented advertising market, where advertisers seek local access. * Consolidation is becoming increasingly important, with more mergers and acquisitions happening.
  • Competitive Landscape: * Nexstar competes with many other local broadcast groups, radio station groups and cable networks. * They also face competition from digital content providers, streaming services, cable networks, tech giants such as Google/YouTube, and Facebook/Meta. * They are the largest local broadcaster in the United States.
  • What Makes Nexstar Different? * Nexstar’s strength lies in their ability to negotiate better carriage and retransmission fees. * They have a broad, geographically diversified portfolio of stations. * They have a relatively diverse revenue model that mixes advertising and retransmission income. * They operate in smaller and mid-sized markets where national networks have less of a footprint.

Moat Analysis:

  • Moat Rating: 2 / 5
    • Limited Brand Value: Nexstar’s brand value is generally limited to the station name, which is only marginally influential in attracting national advertisers.
    • No Network Effects: Their business isn’t dependent on user network effects. A local station with multiple affiliates doesn’t produce network effects.
    • Low Switching Costs: Advertising contracts for television stations are not very sticky. Advertisers can always switch. Even cable/satellite distributors may choose not to carry their station to their customers
    • Weak Cost Advantage: Nexstar is a large media company, but their operations are not cheap. The scale gives some benefits in content acquisition and advertising sales, but that advantage is not unique. Also, they still incur higher costs associated with broadcasting operations like personnel, energy, and maintenance.
  • In the competitive landscape of local broadcasting, moats are typically narrow and often threatened by change.
  • They are a content distributor, their content often gets its moat from having an NFL license etc., and this license expires and needs renewal. So, they are paying a huge amount to maintain their license to a product that has a limited lifetime.

Risks That Can Harm the Moat and Business Resilience:

  • Cord-Cutting: The shift of viewership towards streaming services and away from traditional broadcast television poses a continuous threat.
  • Advertising Revenue Volatility: Nexstar’s revenues are heavily dependent on advertising, which fluctuates based on economic conditions and political advertising cycles. Macro-economic downturns tend to be correlated with a reduction in advertisements by major advertisers.
  • Debt Burden: High debt levels expose the company to financial risks, especially as interest rates rise.
  • Regulatory Uncertainty: Changes in FCC regulations or cable-carriage rules could significantly impact their revenue and operations.
  • Competition from Digital Media: The rise of digital advertising platforms continues to erode advertising market share from the traditional players.

Recent Controversies/Problems:

  • The most significant recent concern is the decline in revenue from their TV stations and lower revenue guidance.
  • They are also facing higher than expected financial costs, which are eating into the profitability of the company.
  • The cable market seems to be in flux. They have been losing subscribers, which is cutting into their business.
  • There is also uncertainty in their long term digital business, with other companies dominating the space and their revenue not being so big.

Financial Analysis:

  • Revenue Distribution: Most of the revenue for Nexstar comes from its broadcast stations and networks. Local television is the most important component, followed by digital and other revenue (such as retransmission fees, sub-licenses, and other digital content and services.)
  • Margins: operating margins have been in the low to mid twenties, but have experienced a decline recently, mainly due to decreased revenue, and higher expenses.
  • Profitability: ROIC has been high but has decreased considerably lately as their profitability has decreased.
  • Debt: Their debt has remained high for many years, but now rising interest rates are impacting their financials.

  • Free Cash Flow: Free cash flow has fluctuated significantly based on changing revenue and is not stable. The company usually does use a large chunk of the cash for acquisitions, further lowering the FCF available for other things.

    • Detailed Financials (based on the most recent 10-Q filed in November 2023 - 3 months ended September 30th):

    • Revenues: $1.13 Billion, a decrease of 4.5% compared to the same period last year.

      *   **Broadcast Revenue:** The company's core business shows a decrease, primarily from a drop in political advertising revenue compared to the same period in 2022.
  *   **Advertising Revenue:** This was $684.3 million in the most recent quarter, a decrease of 11.2%, driven by the decline in political revenue. 

    *   While local and national advertising was up, the decrease in political ad spending caused the decline.
  *   **Distribution Revenue:** $420.6 million in the most recent quarter, representing a 3.3% increase year-over-year.

    * This segment comprises revenues that come from retransmission of their stations and other channels.

  *   **Digital Revenue:** While digital revenue is part of a large trend, it was down 1.8% for the most recent quarter.    *   **Operating Expenses:** Total operating expenses were $939.9 million in the most recent quarter, up by 2.1%.

  *   Programming and Production Expenses were up 1.2% to $390 million, including costs from the linear TV Networks, and content costs from acquisitions.
  *   Selling, General, and Administration expenses were also up by 1.9%.

    • Net Income: was $16.9 million in the most recent quarter, which was down more than 70% from the same period a year ago.

    • Cash flow from operations: was 443.5 million for the 9 months ended September 30, 2023, which decreased 17% versus the prior year.

      • The company expects full year cash flow from operations to be $1.2 Billion vs $1.3B guidance, driven by the decline in advertising and higher interest rates.
    * **Balance Sheet**:

    *   **Total Assets:** $11.6 Billion
    *   **Total Liabilities:** $9.8 Billion
         * The company is highly leveraged.
    *   **Goodwill and Intangible assets**: make up the majority of total assets. The company's goodwill is $3.67 B.
  • Other notable items: The company continues to actively repurchase its own stock. They spent $44 Million on share repurchases in the latest quarter. They have been on a multi-year restructuring plan that will likely cost them a few more quarters, and have significant amounts of debt.

Financial Analysis Key Takeaways

  • Declining revenue, especially in advertising, is a concerning trend that directly impacts the profitability of the company.
  • The company is facing high expenses, including their interest expenses and the amortization of intangible assets. These expenses, combined with a negative trend in revenue, are impacting their profits.
  • While they continue to operate as a cash generative business, there is limited growth and significant risks associated with their operations.
  • They are highly leveraged and any increase in interest rates will hurt the company severely.

Understandability Rating: 3 / 5

  • The core business is not very hard to grasp, i.e. they are in broadcasting, content creation and distribution, and sales/advertisements.
  • However, the company has many assets and operations, which make the business more complicated.
  • Their financial statements are difficult to read and need expertise for understanding.
  • The company has a lot of moving parts with M&A, complex partnerships and licensing agreements.
  • The company is constantly acquiring new stations and their various subsidiaries, which makes the company hard to analyze.

Balance Sheet Health: 2 / 5

  • Nexstar carries a large amount of debt, mainly acquired to fuel their acquisitions. Their debt burden makes them highly vulnerable to interest rate changes.
  • A large portion of their assets are goodwill and intangibles, which can change in value, and the risk of an impairment is also present.
  • They do generate a good amount of cash from their operations, although a lot is used for expansion.

Conclusion:

Nexstar Media Group operates in a very complex and dynamic industry. They have a very broad footprint and reach in the broadcasting space, making it important to follow their operations. They are also trying to diversify by investing more into the digital advertising space. However, they face competition from established players in the digital space, and their growth in this space has been weak. They also operate a business where their profits fluctuate based on political cycles. Moreover, higher interest rates are a major threat as the company is highly leveraged. They do need to focus on efficiency, and improve margins while maintaining their market share. I recommend a cautious outlook on the company, as the overall growth is not that high, their cash flow is declining, and their debt burden is worrisome in the face of interest rate increases. The business has significant risks and they need to be managed effectively for long term success.