NBC, Political Fears And Digital Doubts Create A Buying Opportunity For Tegna

Tegna Media is the largest independent station group of major network affiliates in the top 25 markets, representing the No. 1 NBC affiliate group, No. 1 CBS Corporation CBS affiliate group and No. 4 ABC affiliate group.

Tegna faces two material near-term overhangs in 2016 political expectations and the step-up in network compensation in 2017 from the renewal of all 17 of their NBC stations.

Buying Opportunity

"[W]e believe the current share price more than reflects those headwinds, and significantly undervalues Tegna's digital portfolio, which accounts for an estimated ~35 percent of total consolidated EBITDA on a blended political/non-political basis, giving them the most tangible, current diversification of cash flow in our broadcast space," analyst Daniel Kurnos wrote in a note.

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Another positive is that over 80 percent of Tegna's subscriber base renewed or up for renewal over 2015–2016, and retransmission growth is expected to be up over 30 percent this year, and another 15 percent in 2017.

Expectations

Furthermore, the analyst believes the optics within digital are misleading, with growth expected to accelerate in 2017, and consensus estimates are not factoring the broadcast initiatives to offset the reverse ramp.

Kurnos expects core growth to remain flattish, while political could accelerate in the back half of 2016.

"We are forecasting $214 million in political in 2016, $1.25 billion in retrains between ‘16–‘17, and $128 million in digital revenues this year, followed by $145 in 2017, growing at a low-teens double-digit rate," Kurnos highlighted.

In addition, Kurnos projects Cars revenue growth to accelerate to 11.5 percent in 2017, with CareerBuilder accelerating to 9.5 percent growth. Furthermore, margins are expected to expand by 250bps for both segments, further diversifying cash flow.

The analyst expects 2016 EPS of $2.52 and 2017 earnings of $2.18 a share, with EBITDA of $1.267 billion and $1.165 billion, respectively.

"While core should offer solid support for the underlying business, the development of higher margin, alternative revenue streams, including retransmission fees, digital and political, is likely to drive enhanced growth long term," Kurnos added.

Shares of Tegna closed Thursday's regular trading session at $2.130, and the target price of $26 represents a potential upside of 22 percent. At time of publication Friday, Tegna was flat on the morning.

Full ratings data available on Benzinga Pro.