sa/cmu stock pitch competition nexstar broadcasting group (nasdaq:nxst) 4.4.2015 christian lamarco...

SA/CMU Stock Pitch CompetitionNexstar Broadcasting Group (NASDAQ:NXST) 4.4.2015

Christian Lamarco & Bryan Thomas

Thesis

• Nexstar operates duopoly markets which generate generous amounts of FCF then used in its acquisition arbitrage model.

• The upcoming 2016 spectrum auction provides a hedge against potential anti-trust issues and internal competition.

• Retransmission consent fees are a high margin revenue stream set to benefit Nexstar in the long term.

• The growth in political ad spend should prove to be a key driver in 2016 revenues due to Nexstar’s strategic positioning in swing states.

• Employing conservative estimates of all line items in a DCF valuation, we believe Nexstar’s fair value is $92, representing 59% upside.

Company Overview

NXST: A television broadcasting and digital media company focused exclusively on the acquisition, development and operation of television stations and interactive community websites in medium-sized markets in the United States, primarily from 30 to 175 of 210 DMAs.

Business Model

Strategy

• Strategic acquisitions• Funded by debt/FCF• Distressed Valuations• Middle Market DMAs

• Local ads vs national

• Duopolies within DMAs• 8% higher

margins

Trends in TV

• Viewers watching more TV than ever before.

• Local ads displacing national shift away from TV.

• Economics of the TV industry make disruption unlikely.

Growth Drivers / Catalysts

• Retransmissions• Digital opportunities• Larger strategic acquisitions• Return capital to shareholders• 2016 political ad spend• 2016 Spectrum auction

The Market Consensus / Bear Thesis

• Advertisers are moving entirely from TV to digital.• Netflix, Apple, etc. will disrupt the TV/Broadcasting

industry.• The company’s debt load is too much to bear.• JSAs, SSAs, and Anti-Trust all remain significant threats.

Risk: Highly Leveraged

• Nature of the business• FCF is compounding at 61%

annually.

• TIE ratio shows steady improvement on top and bottom.• Share price moving in line.

• Debt to assets has been decreasing.

•Share price moving in line.

Risk: Cable Cutters

• Cable users as a percentage of all tv watchers has fallen from 68% to 57% from 1996 to 2015.

• Displaced by ADS• NXST stations still shown

on DTV, DISH, etc.• NXST is still paid

retransmission fees from ADS subscribers.

Risk: Anti-Trust Concerns

• Nexstar’s duopoly operating model lends itself to possible antitrust litigation.

• National level• Sitting at 18% of 39% cap.

• Within DMAs• Spectrum auction protects downside.

Valuation

• P/E = 28.89• P/FCF = 12.70• EV/EBITDA = 10.75

Valuation

Valuation

Q&A

Appendix (A): Share Price (1 year)

Appendix (A): Share Price (5 years)

Appendix (B): TV Still the Most Influential

Appendix (C) : Revenue Mix Changes

Appendix (C) : Revenue Mix Changes

Appendix (D): P/FCF Valuation

Appendix (D): Comparables Analysis

Appendix (E): Spectrum Auction