Investidea: Gray Television, because the zombie

Investidea: Gray Television, because the zombie

Today we have a moderately speculative idea.: take shares in Gray Television media company (NYSE: GTN), to capitalize on their hidden potential.

Growth potential and validity: 16% behind 18 months excluding dividends; 7% per annum during 8 years.

Why stocks can go up: there is great potential in these stocks, who is waiting, when it is revealed to the world by the efforts of an activist investor.

How do we act: we take shares now by 20,49 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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Investment editorial office

What the company makes money on

This is a media holding, owning regional American television stations. In fact, this is a set of provincial TV channels.

According to the annual report, Gray's revenue is divided into the following segments:

  1. Advertising - 58,8%. That, what companies pay for on-air advertising. Advertising at the local level gives 32,4%, at the federal 8,3%, and 18,1% is a political ad.
  2. Payment for impressions 36,4%. Revenue, that Gray receives from TV service providers for broadcasting its content.
  3. Marketing and Events - 2,6%. The company also makes money from organizing sports and entertainment events and producing programs about cars..
  4. Other - 2,2%. Revenue from content production, TV tower rental, one-time projects, content duplication services and non-core services.

Worth noting, that in different segments the company calculated revenue as from television, and from Internet assets, but we don't know the exact proportion of internet businesses in her business.

The company operates only in the USA.

Arguments in favor of the company

Can buy. Компания присутствует на 113 региональных рынках США и покрывает 36% country households, TV owners. Of the five largest independent television groups in the United States, Gray is the fourth in terms of revenue - and in 2 times smaller than the largest of the list, Nexstar.

It is inexpensive as in absolute, as well as in relative terms: capitalization 1,98 billion, P / E — 8,6 and P / S — 0,8. Finally, her business is stable and resilient. All this makes it an attractive target for absorption.. And its management may well push the shareholders to such a takeover of the company..

Activist fund managers in the US today, seem to be, overeat sugar and show frenzied activity: they exert active pressure on the management of companies, whose shares have not revealed their full potential.

Very high probability, that such an activist will soon appear among Gray shareholders, which will require the sale of the company. Basically, a buyer for Gray can be found without coercion by activists, but for the past few years, Gray's stock has been treading water, despite the fact that the listed advantages of the company could lead to an increase in capitalization. Exactly this, in my opinion, makes it very likely that there will be a conspiracy and revolt among shareholders to force Gray's management to finally do something to increase the stock.

May be, this will be a significant increase in dividends by the company - now it is 0,32 $ per share per year, or 1,55% per annum. But I still think, that the most likely outcome of the hypothetical campaign would be the sale of Gray.

But in that, that there is a buyer, I have almost no doubt. By itself, Gray is very cost-effective, and how a media asset allows you to influence “one-story America”, which in 2016 привела к власти Трампа, and in 2021 так сильно забрыкалась, what scared the left-liberal establishment. So I wouldn't be surprised, having learned, that Gray will buy some Jeff Bezos or Bill Gates. Although, certainly, acquisition of the company by a larger media holding like Tegna is more likely.

Yes, and the sale may not take place - but the very fact of a dispute on this topic should have an extremely positive impact on the company's stock quotes and lead to the achievement of the target sale price..

Annual revenue of the largest independent broadcasters in the United States, million dollars



What can get in the way

Concentration. Car advertising gives 21% advertising segment revenue, what makes the company sensitive to the successes and failures of car dealers. It is also worth noting the strong dependence of the company's reporting on political advertising., дающей ей 18% proceeds. В этом году траты на политическую рекламу в США составят ориентировочно 3,8 млрд долларов — против 4,5 billion c 2020.

Not cool. Ordinary TV slow, but surely dying, making way for streaming. This will negatively affect both the company's business itself - in the long run., as subscribers and advertisers leave regular TV, — and on the perception of its quotes by investors here and now.

Last moment, obviously, led to that, that the company is now very cheap relative to its fundamentals. I wouldn't have much hope, that crowds of investors will descend on Gray shares, wanting to ride out the market storm and get out of overpriced tech startups.

Let's catch up, let's overtake. Among 12 of the largest American teleconglomerates Gray is in last place in terms of the number of households, using the advanced broadcasting standard NextGen TV. This, On the one side, makes it less attractive in the eyes of a potential buyer, on the other hand, it will encourage Gray to invest extra money in the development of NextGen TV. A business, undoubtedly, good, but this will greatly reduce the potential for a company to increase dividends.

Accounting. The company has a huge debt burden: 5,367 billion dollars, из которых в течение года нужно закрыть только 280 million. The company has enough money to close urgent debts: 322 млн на счетах плюс 440 mln of counterparties' debts.

But the company's needs to expand and develop the business, combined with large debt, serve which will become more expensive after the increase in rates, greatly reduce the likelihood of a significant increase in dividends by the company. And they even increase the risks of reducing existing payments - although not a fact, that investors will start dumping Gray shares due to their loss. Well, Besides, a large debt will scare away some investors.

Not a blockbuster. Gray is a normal company and a worthy business, when viewed from the point of view of owners and employees. It is slowly growing and developing., occupies its own regional niche, but from the point of view of a shareholder, I still do not see powerful growth drivers for shares here, apart from external factors, namely campaigns of an investor-activist. However, I would be happy to be wrong about this.. May be, it is not the intervention of an activist fund that will lead to a rise in stocks, and gray management decisions.

What's the bottom line?

Shares can be taken now by 20,49 $. And then there are two options.:

  1. wait for the stock to rise 24 $, who asked for them in April 2019. Think, that we will reach this level in the next 18 Months;
  2. hold shares 8 years, receive dividends and expect the sale of the company during this time.

You can also look at the news section on the company's website: suddenly she decides to cut dividends. But unlikely, that cutting payouts will cause stocks to fall.