Summary:
- Based on asset reproduction value, TEGNA has a real net asset value of 5 billion dollars implying an intrinsic value of $24.67. Tegna is currently trading at a book value of 3 billion dollars or $14.40 per share. TEGNA is an undervalued stock with a potential 70% upside.
- Furthermore earnings power value is close to 10.5 billion dollars (based on a 6.7% weighted average cost of capital). Subtracting net debt of 2.5 billion dollars, this method indicates an equity value of 8 billion dollars. The difference in asset reproduction value and economic power value implies that TEGNA holds significant barriers to entry that allow it to generate earnings in excess of reproduction costs of assets. Investors undervalue TEGNA.
Business Summary:
Tegna is a television broadcasting company that owns 64 television stations (53 of which belong to one of the Big 4 networks) and two radio stations. TEGNA is also majority owner in Premion, an advertising solution that provides targeted local advertising on a variety of streaming platforms.
Revenue Segmentation:
- Subscriptions: Revenue earned from cable, satellite and streaming service providers for retransmission of TEGNA TV station signals on their platforms.
- Advertising and Marketing: Revenue generated by local and national non-political television advertising, digital marketing services (Premion), and advertising on station’s websites and apps.
- Political Advertising: Revenue from even year election cycles at the local and national level.
- Other Services: Revenue generated from production programming, tower rentals and distribution of local news content.
Company Performance:
TEGNA is a profitable company that averaged 17% in net profit margins over the past seven years. Net income in 2016 came in at 488 million increasing to 631 million in 2022. This increase of 143 million represents a 3.7% compounded annual growth rate.
Free Cash flow has seen similar growth increasing from 583 million in 2016 to 760 million in 2022. This 177 million dollar increase represents a 3.8% compounded annual growth rate.
Valuation: Investors Undervalue TEGNA
The reproduction value of TEGNA’s assets differ significantly from book value. The value of TEGNA’s TV broadcasting stations (5.7 billion) alone is greater than the book value of intangible assets (5.5 billion).
Value of TV stations is calculated using most recent TV station acquisition mulitple ( 11 TV stations for 740 million at 6.7x EBITDA, March 2019) by the number of stations. We omit Premion revenue to prevent inflated EBITDA per station and value Premion separately.
Sensitivity analysis for the replacement value of TV Stations based on changes in operating profit per station and EBITDA multiple
In February 2020, TEGNA sold an undisclosed minority stake in Premion to Gray Television for 14 million dollars. This minority interest should fall between 1 and 50% ownership. This model assumes a 10% minority interest and from this assumption we derive an approximate P/S multiple at purchase of 1.4x in 2020. (140 million in Premion valuation / 100 million in revenue). Using the historical P/S multiple on current revenues we derive a value of 358 million for Premion (255million in revenue * 1.4x P/S multiple). The following is a sensitivity analysis for the value of Premion based on the P/S multiple and Premion revenue.
Indefinite and other intangible assets are derived from TEGNA’s most recent 10-Q. These assets represent a combination of TV and radio broadcasting licenses, retransmission agreements, and other network affiliation agreements. Amortization, depreciation, and total liabilities are all from the most recent 10-Q
Earnings Power Value Implies Economic Moat and Undervaluation of TEGNA shares
If we assume trailing twelve month revenues remain constant into perpetuity, TEGNA’s implied share price (based on 6.8% WACC and 29.6% operating margin) is $39.49. The difference in economic power value and asset reproduction value mean one of two things
- TEGNA has a significant economic moat which allows it to generate earnings in excess of reproduction value
- There are other intangible assets that were not implemented into the reproduction value (more plausible explanation)
Neither of these cases change the fact that TEGNA is an undervalued stock.
