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Nexstar (NXST) Q4 Earnings Down Y/Y, Political Revenues Rise

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Nexstar Media Group (NXST - Free Report) reported fourth-quarter 2018 earnings of $3.22 per share compared with $7.97 in the year-ago quarter. The year-ago quarter’s figure included a tax benefit of $292.3 million.

The Zacks Consensus Estimate for fourth-quarter earnings was pegged at $3.56.

Revenues increased 22.1% year over year to $798 million, driven by higher political advertising and non-television advertising (consists of Retransmission fee and digital) revenues.

In December 2018, Nexstar entered into an agreement to acquire all outstanding shares of Tribune Media for $46.50 per share in a cash transaction that is valued at $6.4 billion, including Tribune Media’s outstanding debt. The transaction reflects a 15.5% premium for Tribune Media shareholders based on its closing price on Nov 30, 2018.

Upon closing, Nexstar will be the largest local television group in the United States and one of the nation’s leading providers of local news, entertainment, sports, lifestyle and network programming across all devices.

Nexstar plans to divest certain television stations necessary to obtain FCC and other regulatory approvals. The company expects to complete the transaction in the third quarter of 2019.

Top-Line Details

Television Ad revenues (55% of revenues) surged 38.9% from the year-ago quarter to $438.5 million, primarily driven by higher political revenues. Nexstar generated increased ad revenues in three out of top five categories and five out of top 10 categories.

New-to-television ad revenues were $16.3 million, up 15.6% year over year. The improvement reflected healthy level of new business.

Nexstar reported political revenues of $140.2 million compared with $12 million in the year-ago quarter. Growth was driven by solid results in the political ad category in markets like Las Vegas, Tampa, Portland and Grand Rapids.

However, local revenues declined 1.5% to $216.5 million. Also, national revenues fell 1.8% to $81.9 million. Heavy allocation of ad inventory to political hurt both local and national top-line growth.

Retransmission fee revenues (35.7% of revenues) increased 12.3% to $284.5 million. Digital revenues were $65 million, up 3.3% year over year.

Year-over-year growth in non-television advertising revenues reflects positive impact from renewals of distribution agreements with MVPDs and initial contributions from distribution agreements with OTT providers. Acquisition of LKQD in early 2018 also contributed.

Operating Details

In the fourth quarter, direct operating expenses, net of trade increased 5.5% from the year-ago quarter to $274.4 million. Growth was primarily attributed to expenses related to increased broadcast ad sales, budget increase related to network affiliation expenses and costs related to LKQD acquisition.

Same-station fixed expenses, including programing expenses, were down 1.3% year over year.

Selling, general and administrative (SG&A) expenses were $129.4 million, up 7.9% on a year-over-year basis. The increase in general & administrative (S&A) expenses was primarily attributed to higher variable costs related to higher political revenues and previously disclosed reclassification of certain digital administrative expenses to corporate expenses.

Adjusted EBITDA surged 56.3% year over year to $352.8 million.

Income from operations jumped 99.6% from the year-ago quarter to $272.8 million.

Improving Liquidity

As of Dec 31, 2018, cash in hand was $145.1 million compared with $115.7 million as of Dec 31, 2017.

Total funded debt was $3.98 billion at the end of 2018, down from $4.36 billion at the end of 2017. Total net leverage was 3.69x compared with 4.23x at the end of the third quarter and 5.07x at the end of year-ago quarter.

Free cash flow was $249.9 million compared with $155.4 million in the year-ago quarter. In 2018, free cash flow was $684.2 million compared with $469 million in 2017.

Nexstar returned more than $120 million in form of share repurchases and dividends in 2018.

Synergies From Tribune Media Acquisition

The Tribune Media deal expands Nexstar’s geographic diversity and audience reach, with a combined pre-divestiture portfolio of 216 full power owned or serviced stations in 118 markets. Post completion, Nexstar will serve 15 of the nation’s top 25 markets and 34 of the top 50 markets. The addition of Tribune will increase Nexstar’s audience reach by approximately 50% from 26%, which means 39% of the U.S. television households.

Nexstar’s pro-forma average annual revenues and adjusted EBITDA are expected to almost double and the deal will be immediately accretive, upon closing. Moreover, the acquisition will result in roughly 46% growth in Nexstar’s pro-forma average annual free cash flow in the 2018-2019 cycle to approximately $900 million per year.

Management plans to deploy free cash flow to lower debt. Net leverage ratio of approximately 5.3x at closing of the deal is expected to decline to approximately 4.0x by the end of 2020.

Guidance

For the first quarter of 2019, Nexstar expects recurring corporate overhead of roughly $20 million. Operating cash taxes are expected to be $20 million.

For 2019, Nexstar expects net political revenues to decline almost $220 million year over year. Both retransmission and digital revenues are expected to grow low-double digits.

Management expects operating cash taxes between $110 million and $115 million for the year.

Nexstar expects long-term distribution revenues to grow double digits.

Zacks Rank & Stocks to Consider

Currently, Nexstar carries a Zacks Rank #3 (Hold).

Charter Communications (CHTR - Free Report) , NTN Buzztime and TEGNA (TGNA - Free Report) are better-ranked stocks in the same industry. All three have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for Charter, NTN and TEGNA is 38%, 20% and 10%, respectively.

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