Nexstar Media: Political Advertising Revenue Could Aid Earnings Growth

Summary

• Nexstar Media Group is anticipated to see a significant rebound in Political Advertising given the upcoming U.S. Presidential Election.
• While net revenue came under pressure in Q4 2023, as compared to the prior year quarter, operating expenses also saw a decline during this period.
• I take a bullish view of Nexstar Media Group.

Investment Thesis: I take the view that Nexstar Media Group has the capacity for further upside on the basis of an anticipated rebound in Political Advertising revenue.

In a previous article back in November 2023, I made the argument that Nexstar Media Group (NASDAQ:NXST) has the capacity for upside going forward, on the basis of anticipated growth in Television Advertising and Distribution revenues.

Since then, the stock has ascended to a price of $159.57 at the time of writing - albeit having descended from a high of $180 earlier this year:

The purpose of this article is to assess whether Nexstar Media Group has the ability to see continued growth from here taking recent performance into consideration.

Performance

When looking at the most recent earnings results for Nexstar Media Group, we can see that net revenue saw a drop of 12.3% in Q4 2023 as compared to that of the prior year quarter.

We see that this was led by a significant drop in Television Advertising, with an 88.7% drop in Political Advertising leading this segment downwards.

With that being said, we saw significant growth in Distribution Revenue over the same period. Specifically, Distribution Revenue was up by 14.4% to $704 million from that of the prior year quarter.

The fact that we have continued to see growth across Distribution Revenue is encouraging, as I had previously made the argument that growth across this segment would be necessary to offset the downward pressure we had been seeing on that of Television Advertising. While contract negotiations had previously led to the temporary removal of certain partner stations from MVPDs, the majority of distribution agreements in 2022 and 2023 have now been renewed on improved terms and annual rate escalators - with growth in virtual MVPD revenue as a result.

When looking at the drop in net income over the period - we see that this is primarily due to a drop in net revenue.

We see that operating expenses on a three-month basis decreased as compared to the prior year quarter. This is encouraging, as we had previously seen that operating expenses had been rising in line with inflationary pressures - further hindering net income growth.

My Perspective and Looking Forward

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the fact that 2024 is an election year for the United States means that we can expect a substantial rebound in Political Advertising revenue going forward.

With respect to the Core Advertising segment, I expect that with a moderating of inflation across the United States more broadly, we could see a rebound in growth across Core Advertising as advertisers expand their budgets once again in anticipation of growth in consumer spending. I expect that heightened media interest as a result of the U.S. election more generally also has the capacity to lift revenue growth across the Core Advertising segment.

When looking to Q4 2020 as a benchmark - given that the last presidential election took place in that year - we can see that Political Advertising revenue came in at just over $298 million, with Core Advertising at just over $473 million.

From this standpoint, I take the view that if we see Political Advertising revenue exceed the $298 million mark for Q4 2024 - then the stock could see upside as a result. In my view, as interest steadily increases throughout the year leading up to November 2024 - then performance across Political Advertising revenue for Q2 and Q3 will be a good indication as to whether Nexstar Media Group is on track to achieve this.

I had previously stated in my previous article that given we had been seeing a fall in earnings for Nexstar Media Group, the company would need to show that it can bolster growth once again before we see meaningful upside.

Since then, the P/E ratio has increased from 12.89 to 16.43, and earnings per share (normalized diluted) are down from $14.15 to $10.27.

Given that the stock was previously trading at $150 in November - when the P/E ratio was lower and earnings per share were higher - I take the view that this is a more accurate representation of fair value for the company at this time, and we could see the stock revert to this level in the short to medium-term. However, a rebound in earnings growth would change my view and the stock could have the capacity to climb back to its prior high of $180 if we see a positive trajectory in earnings once again.

Taking this into consideration, I am of the opinion that while the outlook for a rebound in Television Advertising Revenue is strong given the upcoming Presidential Elections - longer-term upside will ultimately be contingent on earnings growth accompanying such a rebound in revenue. Given the success of Nexstar Media Group in reducing operating expenses in the most recent quarter, I am optimistic that the company has the capacity to grow net income from here if net revenue sees upside.

Risks

In terms of the potential risks to Nexstar Media Group at this time, I take the view that the stock could see downward pressure in the event that a pickup across Political Advertising revenue does not result in a substantial rebound in earnings.

This could be the case if we continue to see downward pressure on Core Advertising - whereby companies are still reluctant to increase their TV advertising budget given both increased competition from streaming platforms as well as potentially lower consumer confidence impacting consumer spending.

Conclusion

To conclude, Nexstar Media Group is expected to see a significant rebound in Television Advertising going forward due to increased Political Advertising in advance of the U.S. elections. In this regard, I take the view that the stock has potential for further upside but will be watching to see if revenue growth is complemented by a rebound in earnings in the quarters ahead.