Gray Television (GTN, Financial) is a media company that owns and operates high-quality stations in 113 television markets, collectively reaching 36% of U.S. households, including markets like Atlanta, Tampa, Cleveland, Charlotte, Orlando, Jacksonville and Knoxville. Yet, the company doesn't get much press because it's focused on local TV stations.
The company is the largest owner of top-rated local television stations and digital assets in the United States. It is the nation’s second-largest television broadcaster, with a pro forma portfolio that includes 79 markets with the top-rated television station and 101 markets with the first and/or second highest rated television station according to Comscore's audience measurement data. Gray also owns video program production, marketing and digital businesses as well as a small film studio, Swirl Films.
Growth via acquisitions
Growth through acquisitions has fueled the top line, pushing it higher from $346 million in 2013 to $3.65 billion last year, all while maintaining healthy 37% gross margins. Operating income has also improved from $85 million a decade ago to nearly $1 billion more recently, which resulted in $455 million hitting the bottom line.
While earnings are expected to be pretty choppy over the next few years, Gray remains in a superior position as long as there are people who want to watch local television. Gray seems to think this is the case considering the amount of money it has spent on acquisitions over the last decade.
Gray announced the acquisition of Hoak Media and Parker Broadcasting stations for $335 million in 2014, and in 2016 acquired television and radio stations from Schurz Communications in a deal valued at approximately $442.5 million.
Fast forward to 2019 and Gray made its largest acquisition to date with a deal valued at $3.65 billion for Raycom Media. This deal made Gray one of the largest television broadcast companies in the U.S. and is known for sports.
In August 2021, Gray completed the acquisition of Quincy Media for $925 million, adding a number of television stations to Gray's portfolio across several states, and in December 2021, Gray also announced the purchase of 17 television stations from Meredith Corp. (MDP, Financial). This deal was reportedly worth $2.7 billion and was another significant addition to the company's broadcasting network.
Competitive advantages
As mentioned previously, Gray reaches approximately 36% of U.S. households. This wide coverage gives it a broad audience base and still provides advertisers with a large target market. It has built a diverse portfolio of assets that allows the company to generate multiple streams of revenue and reduce its reliance on a single market or type of content.
Gray owns and operates stations affiliated with major broadcast networks like CBS, NBC, ABC and FOX. These stations carry network programming and provide local news and other local content. Collectively, Gray remains the largest owner of top-rated local stations in the country, which remains a strong advantage for now, especially during election cycles.
Political advertising remains a big profit center for the company, with political campaigns and candidates purchasing advertising spots on Gray's stations to reach voters in their respective regional markets. While a lot of money is being shifted away to digital, TV still gets in front of a high portion of voters. In fact, political advertising is still a significant revenue driver at Gray.
Speaking of digital, Gray has expanded its presence in the digital media space and now generates revenue through digital advertising on its websites, mobile apps and other digital platforms. This includes display ads, video ads, sponsored content and other forms of digital advertising. While it doesn’t carry the same monopolistic viewership as with local television, together digital and TV can work together to drive brand awareness and revenue.
Thoughts on valuation
As of June 20, 2023, Gray Television had a market capitalization of roughly $720 million and an enterprise value of $7.5 billion. So, while the company’s trailing 12-month price-earnings ratio was just 2.24 and its price-sales ratio was 0.19, the amount of debt really puts things into perspective as to why the stock has been cut in half from last year.
One saving grace is that Gray generates a hefty $1.1 billion in operating cash flow. It also pays a decent 4.29% dividend yield, and is likely in no real danger of going bankrupt based on the Piotroski F-Score of 7 out of 9.
Advertising revenue is a significant source of income for Gray, and rates are typically based on factors such as the time slot, program popularity and market size. While television ad spend has rebounded from 2020, it is still on the decline, which is why the company has started to focus on digital branding.
Gray is likely going to see a performance downturn this year compared to its impressive figures from last year. The integration of several business acquisitions led to unprecedented results, with profits skyrocketing on the back of a 52% rise in revenue. Specifically, political advertising revenues increased by 38% in 2022 compared to the figures reported during the 2018 U.S. midterm elections. Again, every couple of years investors could see a spike in profits for this company based on campaign spending.
That’s why looking forward to 2024 promises a much more positive outcome, thanks in part to the management team's efforts, but mostly because of the upcoming U.S. presidential and congressional races. If Gray can use some of those big years to pay down debt, it will go along way to making the market re-value the stock price.
