This Up-and-Coming Hedge Fund Manager Loves the TV Broadcasting Industry, Should You?
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A new feature for the Invest for Kids conference this year was the introduction of an emerging manager panel for fund managers who are early in their careers and running small firms. One of these panel members was Kelly Cardwell of Central Square Management. Cardwell made a long recommendation for NexStar Broadcasting Group (NASDAQ: NXST), the TV broadcasting and media company. Cardwell says that "people still watch TV...broadcasting still gets ad dollars, print is dying but broadcasting is picking up." Broadcasting has been unjustifiably beaten down along with the print and newspaper companies. As advertising dollars are pulled from print, the broadcasting companies are actually managing to pick up some of this spending.
Cardwell founded the long/short fund Central Square Management in 2007. The firm focuses on a fundamental based bottom-up approach for picking stocks. Prior to Central Square, Cardwell worked at Fidelity Investments. The key appeal for Cardwell is NexStar’s free cash flow generation, which is around $1.85 per share. The transition to digital has taken its toll on print—newspaper and magazines—but this has not been the case for broadcasting. For NexStar, given all the free cash flow, Cardwell believes the broadcaster could soon pay a dividend between $0.50 and $0.60, which would be a 4-5% dividend yield.
Other top broadcasting and media competitors include Comcast (NASDAQ: CMCSA), CBS (NYSE: CBS), Viacom (NASDAQ: VIA), and News Corp (NASDAQ: NWS). Comcast is expected to see revenue growth in both 2012 and 2013 thanks to the full integration of NBC Universal. The broadcaster is also seeing positive demand from bundled video, voice and Internet services. Comcast has been working hard of late with strategic divestitures that have allowed the company to amass some $9 billion in cash, which gives the company ample liquidity for new projects or acquisitions. Comcast is also loved by hedge funds, with over 40 funds owning the stock.
CBS has seen healthy advertising gains, helping drive the forecasted revenue growth of 6% in 2012. CBS is also embarking on digital streaming to help further diversify its revenue stream. They were able to beat 3Q EPS estimates by $0.05 with operating income before depreciation up 7% year over year.
Viacom is expected to see revenue down 3.1% for fiscal year 2012 but up 3.5% in 2013 on double-digit growth in core media networks. Viacom is banking on TV advertising and streaming deals with the likes of Netflix and Hulu to drive earnings over the interim, but it does see continued pressure with ongoing rating issues at Nickelodeon.
News Corp is the fifth most popular stock amongst hedge funds. Part of this interest is driven by the broadcasting company’s ability to generate solid revenue growth, expected to be up 2.3% in 2013 and 4.3% in 2014. This growth is being driven by strong advertising revenues. As the company completes the separation of its publishing and entertainment businesses, there should be sizable value unlocked in its TV business.
As of the end of June, Nexstar was Central Square Management’s fourth largest 2Q 13F holding. The Nexstar position comprised close to 1.2 million shares—making up over 8% of the fund’s 13F. Nexstar also had other big name fund managers as investors at the end of 2Q, including Jim Simons and Joel Greenblatt.
Nexstar is by far the smallest of the five media stocks at a market cap that is sub-$200 million; it is already up 50% year to date and should be considered a moderately speculative play. Even so, we see Cardwell’s thesis as compelling. Nexstar trades below the peer average of 17x earnings, at 14x earnings. Nexstar is also at a steep discount on a P/S basis, trading at 0.6x, versus the peer average of 1.6x.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.