The Case for Tegna (NYSE:TGNA)

Recommendation: BUY
Price Target: $17.00 (~32% upside, as of 10/3/17)

Television broadcasting is not a sexy industry.  In an era that is increasingly focused on digital media, cord-cutting, and over-the-top (OTT) content, many people no longer value the importance of local television broadcasting.

It is not surprising then, that broadcasters have suffered from falling stock prices.  Tegna is certainly no exception.

Company Overview
Headquartered in McLean, VA, Tegna is a broadcast media company that was created when Gannett Company split into two separate entities in 2015.  Tegna kept the broadcasting and digital media assets, while Gannett took the newspaper publishing unit.

Today, Tegna essentially operates as a “pure play” broadcaster, having divested their non-core digital media units earlier this year: namely, Cars.com and CareerBuilder.  The company enjoys leading market share and reaches over 36 million households (nearly one third of all U.S. television households) across its 46 TV stations.  Beyond that, Tegna represents the #1 NBC affiliate group, #2 CBS affiliate group, and #5 ABC affiliate group (excluding owner-operators).

The company has LTM revenue and EBITDA of ~$3.0 billion and ~1.0 billion, respectively.  With a market cap of $2.9 billion, Tegna currently trades around 7.0 P/E (6.4x EV/EBITDA) — a steep discount to its peer group.

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1. Tegna’s Spin-off Strategy is Widely Misunderstood by the Street

Tegna’s stock price has fallen to ~$13.31 per share since late May (+40% decline), largely due to investor confusion around the company’s growth strategy and the decisions to divest their largest digital assets.  Moody’s recently downgraded the company to Ba2 Stable on September 28, citing these same concerns.

However, Tegna management believes that the Cars.com spin-off and the CareerBuilder sale will provide the company with greater capital structure flexibility to invest in organic growth and pursue value enhancing investments and acquisitions.  Moreover, management is committed to cleaning up the Tegna’s balance sheet and has used these sale proceeds to pay down outstanding debt.  As a result, total leverage has fallen back down to the company’s 2009 levels (~3.2x EBITDA), from its recent ~4.5x peak in 2014.

Historically, the company’s broadcasting unit has generated steady Operating Profit margins in excess of 40%, while their digital segment has yielded ~15%.  While Management understands that digital media is the long-term vehicle for growth, and plans to expand its Premion unit (their budding OTT digital advertising platform), they are currently focused on taking advantage of their higher margin broadcasting units (Core Advertising, Political Advertising, and Retransmission Fees) in order to drive shareholder value.

2. Tegna is Uniquely Positioned for 2018 (and Beyond)

As the #1 NBC affiliate group, Tegna is uniquely positioned for retransmission and advertising fee growth in 2018.  On February 4th, 2018, Super Bowl LII will air on NBC.  Soaring ticket prices, combined with artic Minnesota temperatures, lead me to believe that many people will choose to watch the big game at home.  After next year, NBC will air Super Bowl LV in 2021.

Later that same week, NBC coverage of the Winter Olympics will begin in PyeongChang, South Korea.  2018 will mark the first time in which the Winter Olympics will be broadcasted live across all U.S. time zones and will feature a new format for its primetime segments.  With Olympic coverage hours increasing and the nation currently more divided than its been in decades, I believe that next year’s Winter Olympics will see record viewership.  Note also: NBC has purchased exclusive coverage of all Olympic Games through 2032.

2018 will also feature a robust slate of highly contested midterm political elections.  With a country deeply divided and unhappy with its current leadership, I anticipate that U.S. citizens will be paying close attention to next year’s political cycle.  This is great news for local television broadcasters like Tegna.  The Cook Political Report predicts 2018 TV ad spending of $2.4 billion for local broadcast and $850 million for local cable (up from the $2.8 billion in total TV ad spending in 2014, the last midterm election year).  The Cook report goes on to predict that there are “42 House seats in play, 12 of them toss-ups, and nine Senate seats in play, four of them toss-ups.  This is similar to Cook ratings at this point in the 2014 and 2016 cycles, but fewer races than were considered competitive at this point in the 2012 cycle.”

Put simply: the more competitive the races, the more that local broadcasters stand to gain from political ad spending.  2018 appears to be no exception.

3. Tegna is a Likely Acquisition Target Regardless of FCC Decision

The proposed ~$4.0 billion Sinclair Broadcasting/Tribune Media merger is a main focal point in the broadcasting space.  The deal is currently under FCC review, as the combined entity is expected to breach the national ownership regulatory cap of 39%.  The proposed mega-merger has also generated widespread public backlash from angry viewers.

If this deal is ultimately approved, I believe that another media conglomerate could choose to acquire Tegna (the only real remaining target of size) to help compete with the new Sinclair-Tribune behemoth.  On the other hand, if the deal is not approved, Sinclair may try to immediately acquire Tegna as a smaller, sensible alternative.

It was recently reported that prior to the company’s completion of the Cars.com spin off, Nexstar Media Group was considering a bid to acquire Tegna.  I have no doubt that other media corporations are currently evaluating Tegna.

Final Thoughts
Management clearly believes that their shares are undervalued and has initiated a new $300 million buyback program.  They have also publicly stated that they plan to continue (and increase) dividend payments as a means to return value back to their shareholders.

Having run the valuation analysis based on the above drivers, as well as the company’s historical broadcasting performance and anticipated future growth strategy, I believe that Tegna is a “buy“, with a price target of $17.00 (~32% upside).


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