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Soid Ahmad
Soid Ahmad
Articles (195)  | Author's Website |

Tegna: A Buying Opportunity

Retransmission and digital revenue stand out while revised growth reveals upside

May 10, 2017 | About:

Tegna Inc. (NYSE:TGNA), a digital media and broadcasting company, reported an EPS of 33 cents in the first quarter, beating the consensus by 1 cent. Revenue, though, was off the mark as Tegna missed consensus by $22.4 million, a year-over-year decline of 0.4%.

The stock is down 10% since the earnings release, creating a buying opportunity as fundamentals look strong and earnings are decent. The market reacted to the declining top-line growth ignoring the fact that the stock is worth $27 even after assuming a lower growth factor. Earnings are still in the money, which is the primary metric to gauge the company’s value.

Anyhow, let’s take a detailed look into the earnings report.

Earnings highlights

During the first quarter, revenue was $778.4 million, a decrease of 0.4% on a year-over-year basis. Revenue decline is explained by a lower demand for political advertising and the Super Bowl shift. Core local and national revenue also witnessed a decline of 9.7% as compared to the same quarter last year. Media segment revenue was stable at $446 million, thanks to the growth of retransmission revenue. Retransmission and digital media revenue grew 24.2% and 14.5%.

The digital segment, including digital properties like Cars.com and CareerBuilder, posted a 1.7% decline in revenue. Growth in Cars.com revenue was offset by a $2.4 million decline in CareerBuilder.

Note that Tegna is planning to spin off Cars.com and sell CareerBuilder. These strategic decisions will allow the company to focus separately on both businesses. Further, the CareerBuilder divestment can help unlock value. It is worth mentioning that retransmission revenue grew by 24.5% on a year-over-year basis while full-year expectations stand at around 18%. Furthermore, excluding the effect of one-time events including political advertisements and the Super Bowl shift, Tegna managed to post revenue growth of 6% in its media segment.

“Excluding the impact of the Super Bowl shift and lower politically related advertising demand, media segment revenues were up 5.9%.” – Earnings release

This is in line with the valuation assumption in my previous piece on the company. However, the management is reluctant to guide for revenue growth. When asked about the revenue growth guidance on the earnings call, the management had the following response:

There's still so much volatility in the marketplace. We're seeing some improvements here and there. It's too early for us to make any declarations one way or the other. It's something we'll continue to follow throughout the year.

Revised valuation and price target

Overall, the media segment was supported by the growth of retransmission and digital revenue while political revenue weighed on the top line. Even if the company fails to achieve midsingle-digit growth, the stock has some upside left. See the revised valuation below:

Assumptions

  1. Consensus EPS estimates are used for 2017 and 2018. Three 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 Standard & Poor's 500 is used as a proxy for market returns.
  3. Incremental earnings are assumed to increase the cost of equity.

Projections,

dollars in millions

   

2017

2018

2019

2020

2021

Perpetuity

   

Notes

           

Net Income

   

387.1

498.0

513.0

528.41

544.2

560.59

 

Cost of capital

r*capital invested

191.6

219.8

249.1

279.6

311.3

344.2

Dividends

   

121.8

121.8

121.8

121.80

121.8

121.80

     

195.5

278.2

263.8

248.77

232.9

216.36

                 

Adjusted Net Income

   

195.5

278.2

263.8

248.77

232.9

216.36

Discount factor

   

1.00

0.93

0.87

0.80

0.75

11.52

Economic Value Added

   

195.5

258.8

228.3

200.25

174.4

2492.47

Period

   

0

1

2

3

4

5

                 
     

Market value added

3550

 
     

Invested Capital

2289

 
     

Value of the equity

5839

 

Perpetual Growth in Residual Earnings

-0.3%

 

Price Target

$26.8

 

Focus Equity Estimates

Valuation sheet indicates a price target of $26.8, translating into an upside of 15%. Note that analysts are modeling for a 10% p.a. growth during the next five years. This valuation assumes a growth rate of 3% during the 2019-2021 period amid management’s reluctance to provide guidance on revenue growth. In short, earnings are stable, and the company can bank on its retransmission and digital growth. Negative price action in the last couple of days creates a buying opportunity that can result in 15% gains over the next few months. Note that the valuation is revised to reflect the reduction in top-line growth. You can review the previous valuation here. If Tegna manages to post 6% p.a. growth during the next five years, the stock is worth more than $30.

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

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About the author:

Soid Ahmad
Soid Ahmad is affiliated with the Association of Chartered Certified Accountants. He graduated from Oxford Brookes University. He also holds a Master's degree in Economics and Finance from HSRW Germany. He has been working as a technology analyst for several years and has an eye for mispriced technology stocks. He is also affiliated with Focus Equity, an independent equity research firm.

Visit Soid Ahmad's Website


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