Gray Television Inc. (GTN, Financial) is a national broadcast television powerhouse with 103 channels across 57 markets covering over 10% of the U.S. Since this stock might not be on the average investor’s radar, let’s take a step back for some history.
Gray was founded in January 1897 along with the creation of The Albany Herald in Albany, Georgia. During its first 90 years, the company acquired a handful of newspapers and television stations and eventually became known as Gray Communications Systems. Then in 1993, Mack Robinson started to transform it through new media acquisitions and old media divesting, basically turning over every held property at that point to get cash in order to acquire or build its localized media empire.
Gray has a very nice business today. In the last 12 months, the company generated $117 million in net income on $872 million in total revenue continuing to build book value and earnings per share, which sit at 7.88 and 1.61 per share. Gray gets a 22.6% return on equity as well, which it has been accelerating during the last four years. This year Gray has been on an acquisition spree, spending over $400 million since January.
January
It spent $8.0 million to acquire three network affiliates in Fairbanks, Alaska and $269.9 million to acquire affiliates in Wisconsin, Iowa and Illinois.
May
It acquired affiliates in Maine and Florida for $85 million, paid $26.5 million for a duopoly in West Virginia and shelled out another $29 million for CBS stations in Vermont and New York.
In fact, over the last four years the company has completed 21 acquisitions and three divestitures while refinancing its debt to reduce interest costs and completing a $500 million senior note private placement due in 2026. So if you’re looking at the $1.8 billion in debt and scratching your head, understand that company has a lot of runway. These notes represent the best deal for debt in the company’s history.
The thesis on Gray is twofold: a slow and steady growth trade with stock revaluation potential. It’s trading at 8 times earnings and 4.6 times cash flow, both of which have been much higher historically.
In five years, we’ll have another World Cup, two Olympics, plenty of live sporting events (a presidential race) and new programs to captivate audiences. Regardless of how much face time your mobile device is getting, people still consume a lot of content via their TVs and despite what some digital ad gurus are saying, the television is not dead.
Networks like Gray will thrive because of the demographics in areas it serves still watch a lot of television. If the company can double its earnings in the next five years like the last five, then this is a $40 stock. Any growth and the valuation will likely move higher. Whether it falls on 10x, 15x or 20x is speculation, but in all three cases the stock price moves higher from here.
Chuck Royce (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) all have small stakes, but as for the guru trade, none of the big four money managers have over 0.10% AUM in Gray. It’s worth more than a flyer.
Disclosure: I am not long/short Gray.
