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Is Seth Klarman's Big Bet on Gray Television Crazy or Contrarian?

Gray Television is the nation's 2nd-largest television broadcaster

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May 23, 2022
Summary
  • Gray Television is the largest owner of top rated local television stations which reach 36% of U.S. households.
  • The company’s goal is to reach over $600 million annual free cash flow in the next 2 years. 
  • Seth Klarman has been buying shares of Gray Television in the first quarter of 2022.
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Gray Television (

GTN, Financial) is the nation’s second-largest television broadcaster and the largest owner of top-rated local television stations. Its stations collectively reach a staggering 36% of all U.S. households.

The company’s share price has doubled since the market crash of 2020, but recently the stock has seen an 11% pullback. It appears value investor

Seth Klarman (Trades, Portfolio) is taking advantage of the dip, as he initiated a new position in Gray Television in the first quarter of 2022 according to his firm's latest 13F report. During the quarter, shares of the stock traded at an average price of $22 per share.

According to Statista, U.S. adults will spend an average of three hours watching TV per day in 2022. However, this trend has been declining and is expected to continue to decline in upcoming years.

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Source: Statista

This is driven by the abundance of alternative content types such as streaming services and even social media platforms such as TikTok. Thus, in my view, Klarman is really taking a contrarian bet by investing into this TV station. Is it really contrarian, or is it just crazy? Let’s dive into the business model, financials and valuation to see if we can find the answer.

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Business model

Gray Television is a TV broadcast company headquartered in Atlanta, Georgia. They are the largest owner of highly rated local television stations in the U.S. In 2021, Gray Television acquired Meredith Corporation’s (

MDP, Financial) local media group and Quincy Media, which cemented their position as the nation’s second largest television broadcaster. The company also owns other smaller businesses in areas such as video production, marketing and more.

Gray Television does have exposure to modern day streaming via their digital services which produce and sell advertising across streaming platforms and third party apps. The company also has strong exposure to political advertising and has grown their coverage of Senate races over the past few years.

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Source: Gray Television investor materials

Financials

For full fiscal 2021, revenue came in at $3.15 billion, up 8% since 2019 but down 7% over the prior year. This was mainly driven by a 6% decline in broadcast revenue (and political advertising). Their smaller production company segment saw a 20% boost to $73 million.

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The company operates with a 33% gross margin and strong 17% operating margin.

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Gray Television has $189 million on their balance sheet, with just $15 million in current debt. Longer-term debt is vast, equating to $6.7 billion. The only silver lining is the company has a “staggered” debt maturity profile (no debt due until 2024) and significant free cash flow generation. This will enable them to pay down debt over time. Their goal is to reach over $600 million annual free cash flow in the next two years. This would be a sharp jump from the $53 million in produced in 2021, but close to similar levels of $542 million achieved in 2020.

They also plan to do “opportunistic” stock buybacks with ~$174 million authorized remaining. The company recently reinstated their quarterly cash dividend with a yield of 1.58%.

Valuation

In terms of valuation, Gray Television trades at an enterprise-value-to-Ebitda ratio of 13.15. This has pulled back slightly from levels seen in 2022, but is still nearly double the average valuation. The stock also trades at a higher valuation when compared to peers such as E.W. Scripps (

SSP, Financial), which trades at an enterprise-value-to-Ebitda ratio of 9.44, and Next Star Media Group (NXST, Financial), which trades at an enterprise-value-to-Ebitda of 6.98.

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According to the GF value line, the stock is modestly undervalued.

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Overall, Gray Television is an interesting company. They are the nation's second-largest TV broadcaster and have exposure to 36% of households. This makes the company popular with political advertising and “carpet bomb” media campaigns. In addition, they have exposure to the growing digital media space through their subsidiary companies. The main risk with the company is their very high debt and the declining watch time of TV in general.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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