Leading The Industry

Core Advertising Outshines The Industry

Compelling Total Return Potential

Core Advertising Is Outpacing Its Peers

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Communication Services

Media - Diversified

Gray Television Inc.

Investment Appraisal
 Gray delivered on a solid first quarter, which reflected limited impact of Covid 19 in the final month of the quarter. The company missed our revenue estimate, but was able to over achieve our cash flow estimate (adj. EBITDA). Figure #1 illustrates the first quarter variance from our estimates. 
Investors are likely to focus on the second quarter, the quarter that is expected to reflect the full impact of the mitigation efforts of Covid 19 and, hopefully, the weakest quarter. Core advertising trends are down roughly 33%, which we believe is somewhat better than the industry in the range of a decrease of 35% to 40%. Encouragingly, there appears to be sequential month to month improvement. Management was sanguine about the outlook for Political advertising, estimating Political to be in the range of its previous expectation between $250 million and $275 million. Finally, Retransmission revenues should benefit from renewals later in the year (mainly December).
The worse may soon be behind it. Management was hopeful that the second quarter would be the worse in terms of the revenue impact from Covid 19, noting that 85% of its stations will be in States that are opening the economies as of May 9th and that no Gray stations will be in markets that will not be open past June 1st. In addition, management was sanguine about cash flow generation at the company, anticipating that the company will be free cash flow positive in each quarter of 2020. The company has significant liquidity. Cash interest expense is expected to be lower than original forecast, $175 million, down from original forecast of $194 million, as a result of lower interest rates. Furthermore, the company is reducing cap ex to $60 million, down from $80 million originally. Finally, cash taxes are expected to be $65 million, rather than $80 million. In total, management stated that there are $54 million in total cash savings.&nbsp;
Free cash flow in every quarter, plenty of liquidity. With the anticipated favorable cash generation, in spite of the difficult operating environment, management anticipated that it will reduce debt in 2020 and increase its cash position. Debt is anticipated to be 4 times debt to cash flow by the end of 2020. The company does not anticipate that there will be an issue with covenants even if it draws on the revolver.&nbsp;
Revised estimates to reflect Covid. We have taken a sober review of our estimates for the company in light of Covid 19 and the economic impact. We are revising our Q2 estimates to reflect the current trends, which are illustrated in our model and reflected our full year 2020 and 2021 revisions (highlighted in Figure #2). Our estimate revisions anticipate core advertising to decline in Q2 by 33%, in Q3 by 25% and in Q4 by 18%. With the anticipated influx of Political in Q3 and Q4, combined with a lift in Retransmission Revenue in Q4, we anticipate total company revenue to decline a modest 2.5% in Q3 and increase 11.9% in Q4. We are posting full year 2020 cash flow (adj. EBITDA) to be $664.0 million and 2021 cash flow of $519 million.
Recession type multiples. Near current levels, the GTN shares trade at 7.0 times Enterprise Value to our 2020 cash flow estimate, or 7.8 times our blended 2020/2021 cash flow estimate. We believe that these multiples reflect recessionary type valuations. While we are revising our price target from $26 to $22 to reflect the lowered cash flow expectations in 2020 and 2021, we continue to rate the shares Outperform. In our view, the company is expected to participate in a rebounding economy and, we believe is positioned to grow through acquisitions. Our revised price target anticipates a target multiple of 9.5 times Enterprise Value to our blended 2020/2021 cash flow estimates. We believe that there is positive upside potential to our cash flow estimates should the economy strengthen faster than our current thoughts.&nbsp;
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Figure #1 
 

 
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/gtnq12020variance.jpg" style="width: 370px;height: 406px" /> 
 

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Figure #1 (cont.)
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/gtnq12020variancecont.jpg" style="width: 365px;height: 571px" /> 
 
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Figure #2

<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/gtn2020revisions.jpg" style="width: 540px;height: 387px" />
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Figure #2 (cont.)
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/gtn2020revisionscont.jpg" style="width: 541px;height: 552px" />

Gray Television Inc. (GTN)

Uncharted and Choppy, But Very Capable To Navigate

Fundamental Analysis:

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Leading The Industry (GTN)

Core Advertising Outshines The Industry (GTN)

Compelling Total Return Potential (GTN)

Core Advertising Is Outpacing Its Peers (GTN)

Inbox Intel from Channelchek.