Local television broadcasting may not be the sexiest growth industry of the day, but it has something most small-cap growth companies can’t find today. That’s loads of profits and free cash flow.
One of the leading broadcasters in the industry is TEGNA (NYSE:TGNA), which operates 62 television stations and four radio stations in 51 markets across the U.S. The company is the owner of four affiliates in the top 25 markets among independent station groups, reaching approximately 39 percent of all television households in the country. It also owns multicast networks True Crime Network and Quest.
TEGNA Marketing Solutions offers effective solutions to help businesses reach consumers through television, email, social media and over-the-top (OTT) platforms, including Premion, which is TEGNA’s OTT advertising product.
TEGNA was created in 2015, when then Gannett (NYSE:GCI) split into two publicly traded companies. Tegna comprised the more profitable broadcast television and digital media divisions of the old Gannett, while GCI retained the newspaper business.
Revenue Sources
Tegna generates key revenue from advertising and marketing services, subscription, political advertising and other services. The advertising fluctuates over a 2-year period due to the biennial nature of political advertising. Subscription revenues are primarily comprised of retransmission fees in which cable and satellite companies pay for rights for local TV stations to appear on their systems.
Revenues increased 28% in 2020 as it was a heated political election year. Acquisition also contributed to that strong increase. For 2021, revenues are expected to be flat as political revenues will decline. However, retransmission revenues are expected to be strong.
Retransmission provides a good source of stability in the odd political years. The repricing of 1/3rd of subscribers in 2020 will boost the retransmission revenues in 2021, and an additional 30% of subscribers are expected be repriced by the end of this year. The stability in profitability as a result of retransmission has allowed Tegna to grow through mergers and acquisitions, while also maintaining a reasonably solid balance sheet.
TGNA Stock Second-Quarter 2021 Results
Almost all financial metrics showed significant improvement over 2020 results. This was due to an improved overall economic picture for most of the country where advertising is strongly correlated with economic growth. EBITDA was strong at $228 million in the quarter. For those of you keeping track, that’s almost $1 billion in annual run-rate EBITDA – a feat not accomplished by probably most if not all of the recent meme stocks or trendy growth small caps.
Advertising trends are somewhat positive but this industry always has its ups and downs. Auto advertising was tough in Q2. But in an ever evolving economy, there’s always new categories. I bet that when Gannett was founded in 1906, they couldn’t have envisioned technology and internet related companies would be among their biggest ad categories.
Valuation and Balance Sheet
TGNA does have a substantial amount of debt totaling almost $3.5 billion. However, unlike some companies I have written about, their leverage ratio is very reasonable at about 3x. The reason is because of their high levels of EBITDA and prodigious cash flow.
However this high debt level also makes the price-to-earnings ratio a little misleading. If TGNA earns consensus estimates of $2.10 for 2021 and $2.94 in 2022, that’s a P/E of 8.4x and 6.0x respectively. On an EV/EBITDA basis, if TGNA can trade for just 8x 2022 EBITDA, the per share value of TGNA stock well exceeds $20.00.
Worst case, the dividend yield on TGNA stock is approximately 2.2% which is shockingly greater than than todays 30-year risk free treasury rate of 1.96%. TGNA is a strong buy for long-term investors.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.
