Since October 2021, the communications sector has been lagging behind the S&P 500, and is down roughly 34% year-to-date, as of Sept. 9.
As the economy braces for a potential recession, TV station operators hope to generate revenues through advertisers and subscribers.
The Analyst: Rosenblatt Securities senior analyst Barton Crockett upgraded sector leader Nexstar Media Group Inc. (NASDAQ:NXST) from Neutral to Buy with a $246 price target, forecasting an upside of 36% as of Sept. 6.
The Texas-based company, the largest television station owner and operator in the U.S., is offering a dividend yield of 1.84% or $3.60 per share annually, utilizing quarterly payments, with a strong track record of increasing its dividends for nine years.
Nexstar, which has 199 stations in 116 markets, is affiliated with the four national broadcasters — CBS, Fox, NBC and ABC — as well as networks in 12 of the top 20 television markets reaching over 68% of American TV households.
Key Takeaways: TV stations can provide stable ad sales despite the recessionary risk, especially in the political entertainment spectrum which is forecasted to obtain above 50% of its ad sales in the first half of 2022, Crockett explained.
In the second quarter of 2022, political ads were above those in the second quarter of 2018 by 80%.
Nexstar is also hedged to cord-cutters with the inclusion of its CBS and NBC affiliates on Paramount Global (NASDAQ:PARA) and Peacock.
As Nexstar owns 75% interest in the CW Network from Paramount and Warner Bros, this represents an opportunity to improve a network that Nexstar believes has been under-managed, and could potentially be the best return on investment acquisition.
Besides political ads, Nexstar’s core TV ads dipped 2.5% in the second quarter as sports betting and auto ads saw heavy declines, with much of the growth coming from the entertainment sector (movies and TV shows).
After calculating the two-year free cash flow per share in ten years and multiplying it by the projected multiple, Rosenblatt analysts forecasted a nine-year price target of $570.31.
Crockett believes that Nexstar can maintain $800 million of yearly repurchases for a medium market cap company, making repurchases a big support for per-share earnings growth.
Downside Risk: In past deep recessions, local TV advertising has been hit sharply, meaningfully impacting stock performance, with base case estimates assuming a muted environment like we have currently.
