Unlock Value With Tegna

Tegna Inc. (TGNA, Financial) is a services company that belongs to the digital media and broadcasting industry. The company is involved in the provision of content through its portfolio of television broadcasters in the U.S. Tegna also has digital assets, including Cars.com and Career Builder. Business segments of the company include Tegna Media, an independent group of major network affiliates, and Tegna Digital, combining Cars.com and CareerBuilder. Tegna was incorporated in 1906 and is based in McLean, Virginia.

Revenue insights

The company generated $1.63 billion, or 58% of its revenue, from the media segment. Core local advertising is the primary source of revenue from this segment. The digital segment contributed $1.41 billion, or 42%, toward 2016 revenue. Cars.com is monetized using subscription advertising products, while CareerBuilder’s revenue primarily comes through providing recruitment solutions, employment screening and human capital management solutions. It is worth mentioning that core advertising revenue declined by 2%, indicating challenges from alternative delivery of content by competitors.

Industry insights

Core local advertising will remain sluggish or even shrink during the next few years. Digital advertising is taking over the conventional linear TV advertising. Digital advertising is set to cross linear TV advertising in terms of ad dollars spent during 2017. According to the global market intelligence at MAGNA, linear TV advertising sales were resilient in 2016, but the growth will come to a halt during 2017.

Source: MAGNA, Global Forecast Update Dec. 2016

Total advertising expenses are expected to grow at a compound annual rate of 4% from 2016 to 2021, which will be fueled by digital advertising at the expense of print advertising. Linear TV advertising will remain resilient, but no growth is expected in the next five years. Search and social advertising sales are expected to grow at 12.4% p.a. during that same period.

Source: MAGNA, Global Forecast Update Dec. 2016

Standard & Poor's  also expects a decline in the TV ad spend. According to the company:

“U.S. TV advertising in 2017 will likely decline due to the absence of political and Olympic advertising this year, continued audience ratings declines and advertisers allocating more dollars to digital video platforms.”

On the other hand, according to e-marketers, U.S. automotive industry ad spend is expected to grow at a CAGR of 12.8% during 2016 to 2020.

To review, linear TV advertising will remain sluggish over the next few years. This will impact Tegna’s media segment revenue as the company generates more than 50% of this revenue from core advertising, which is set to decline around 1.5% p.a. over the next five years. However, 6% of the media segment's revenue and all the revenue from the digital segment is exposed to the growth of digital advertising. Overall, the stagnation in linear advertising will be offset by the growth of the company's digital assets.

Spinoff will enhance focus

Tegna is planning to spin off Cars.com into a separate standalone company. Further, the company is also strategically reviewing a divestment of CareerBuilder. Both these developments can have a positive impact on the company’s value. Separating the business will allow Cars.com's management to focus solely on the digital strategy without worrying about the linear TV strategy. Both businesses can then be aligned based on their respective growth prospects. Further, unlocked resources from selling the CareerBuilder stake can assist in accelerating the digital strategy of the company. It is worth mentioning that, according to Reuters, private equity firm GTCR LLC is in exclusive talks to acquire CareerBuilder for more than $1 billion.

Retransmission will drive growth

Retransmission revenue grew 30% during 2016 to reach $582 million. It is further expected to reach $690 million in 2017, translating into growth of 18%. The point is retransmission, digital advertising and Cars.com will keep the growth forecasts of mid-single-digits intact.

Evolution in the industry can hurt Tegna

The advertising industry continues to evolve and new technology is enabling customers to receive content though multiple platforms. This can erode Tegna’s revenue base if the company fails to evolve in terms of its content distribution strategy.

The digital automotive industry is evolving. Further, low barriers to entry enable new players to enter the market, which can pressurize Cars.com’s pricing structure. The “cutting the cord” trend may cause difficulties for the company to generate media segment revenue going forward.

Valuation seems attractive

The company is expected to continue to follow its growth trajectory. Even with the assumption of lower growth, the economic value added valuation looks attractive.

Assumptions

1. Consensus EPS estimates are used for 2017 and 2018. Six percent growth is assumed during 2019 to 2021 amid growth in digital, retransmission and prospects of Cars.com. One percent growth is assumed in perpetuity.
2. The capital asset pricing model is used to calculate the cost of equity. The S&P 500 is used as a proxy for market returns.
3. Incremental earnings are assumed to increase the cost of equity.

Focus Equity Estimates

The valuation sheet reveals an upside of more than 15% for Tegna. Note this is based on earnings growth of 6%, which is a conservative estimate as digital marketing is set to grow at 12% going forward, while retransmission revenue is set to grow 18% next year. Core advertising will not be able to offset this growth as industry forecasts clearly point toward a decline of around 1% p.a. over the next five years.

Perpetual growth indicates residual earnings will grow at 1% p.a. in perpetuity. Compare this with the implied growth in residual earnings. Implied growth indicates how much a company has to grow in order to maintain its current market valuation.

Focus Equity Estimates, Powered by Prudena

Without any growth in earnings, the company is worth $27 a share. Tegna has to experience negative growth in order to reach its current market value, which is $25.9. As the company is set to grow at 1% in perpetuity, the stock should trade at a price that is higher than $27. Implied growth conforms to the price target derived through EVA valuation.

Final thoughts
Growth in digital advertising is expected to offset the stagnation in linear TV advertising. Spinning off Cars.com will help management focus on growth priorities. The CareerBuilder divestment will provide capital for pursuing growth opportunities. Further, retransmission revenue will continue to boost the company’s top-line growth. Valuation also paints a favorable picture given that implied growth stands at 1%. All in all, Tegna seems a buy with around 15% to 20% upside.

Disclosure: I have no position in any stocks mentioned and no plans to initiate any positions in the next 72 hours.

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