Nexstar Earnings: Second-Tier Sports Rights Will Not Lead The CW to Profitability

Nexstar NXST reported a solid second quarter as revenue met and adjusted EBITDA slightly exceeded the top end of management’s guidance. Despite the solid results, shares traded down 4% as we think investors were spooked by management’s commentary about continuing to invest in sports rights for The CW. While we remain skeptical about the long-term opportunity at the network, we don’t expect Nexstar to go crazy by trying to outbid its much larger competitors. We think Nexstar will try to pick off lower-priced or unloved rights similar to the deal to carry Nascar’s second-tier Xfinity series. However, we think that these deals are unlikely to move the needle significantly even if The CW can break even on them. We are maintaining our $205 fair value estimate.

Despite the expected loss of political advertising, total revenue of $1.24 billion was flat year over year, driven by a 6% increase in distribution revenue, excluding The CW. Core advertising revenue excluding The CW fell 8% due to moderate national advertising weakness. Maintaining core advertising revenue has been an ongoing challenge, especially nationally, but headwinds seem to be improving as management is confident that better economic conditions will lift spending. Political ad revenue is set to grow in late 2023 and into next year as the 2024 presidential election kicks off. Both The Hill and NewsNation should benefit from what we project will be a record level of spending.

Despite this, continued low- to mid-single-digit traditional pay-TV subscriber declines will make organic revenue growth challenging. The addition of The CW has lessened the impact of subscriber losses and helped grow distribution revenue by 7% this quarter to $696 million. Despite an ongoing carriage dispute with DirectTV, we expect distribution revenue to continue growth in the mid- to upper-single digits over the near term, driven by revenue from the network carriage agreements that are up for renewal before the end of the year.