What Does Seth Klarman Like About Nexstar?
- By Rupert Hargreaves
Earlier this month, the largest hedge funds in the world filed their 13F reports with the Securities and Exchange Commission. Funds that filed these reports included Seth Klarman (Trades, Portfolio)'s Baupost Group.
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I keep an eye on the stocks Klarman is adding and removing from his portfolio. Even though 13Fs only provide a snapshot of the portfolio at one point in time, and exclude equity holdings outside the United States as well as cash and debt, they are a great starting point for further research, particularly when the investment manager calling the shots is one of the best value investors alive today.
I have already outlined the major additions to Klarman's portfolio. However, I think some of the smaller holdings are more interesting and could offer value for investors who are looking for undervalued, hidden stocks.
Klarman's smaller positions
One of the smaller positions added to the portfolio in the fourth quarter was Nexstar Media Group Inc. (NXST).
With a market capitalization of around $4.1 billion, it is not a particularly small company. Baupost owns 950,000 shares, for a holding worth $75 million at the end of 2018. This is a relatively large position because the three-month average daily volume for the stock is around 450,000 shares.
So what is there to like about this business? First, the company's is focused on the acquisition, development and operation of television stations and websites around the U.S. and is currently in the process of acquiring Tribune Media (TRCO) for $4.1 billion. As part of this deal, the company is trying to shed a portfolio of local TV stations worth about $1 billion to private equity firm Apollo.
When the deal is completed, Nexstar will become the most significant local TV operator in the U.S. It is currently the second largest, just behind Sinclair (SBGI).
It seems Klarman is betting that the deal will go through, and the enlarged Nexstar will be able to compete more effectively on the national TV stage as well as become a country-wide media leader.
I think this deal has many similarities to Discovery Communications' (DISCK) acquisition of Starz last year.
By combining, the two companies created a global media giant that was able to cut costs as it merged operations. The media sector is under increasing pressure from companies like Netflix (NFLX) and Amazon (AMZN), which have their own streaming services. Nexstar and Discovery can only compete by merging and using scale to produce a more efficient operation.
Cheap stock
Klarman, it seems, is betting the merger will lead to earnings growth at Nexstar. The stock is already dirt cheap, trading at just under 11 times Wall Street's estimate of 2018 earnings. That's compared to the media sector average of around 17.
Under the current management tean, the company has snowballed over the last six years. Revenue has increased from around $380 million in 2012 to an estimated $2.8 billion for 2018. Over the same period, operating profit has increased 400%.
The company recently extended the employment agreement of President and CEO Perry Sook though February 2023, giving him enough time to oversee the integration of the Tribune assets.
If management can replicate the success they have achieved over the past several years of acquiring and integrating businesses, I see no reason why this deal won't be a substantial success.
I think this is what Klarman is betting on. He has seen how successful the current management has been in growing the business over the past five years and thinks this growth can continue, and possibly accelerate, with the acquisition of Tribune. It will be interesting to see how this investment plays out over the next several years.
Disclosure: The author owns shares of Discovery Communications.
Read more here:
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Seth Klarman and Mohnish Pabrai's Portfolio Movements in 4th-Quarter 2018
This article first appeared on GuruFocus.
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