In this article I use AAII’s A+ Investor Stock Grades to provide insight into three broadcasting stocks. With the demand increasing after the lulls of consumer discretionary spending during the pandemic, broadcasting stocks have seen some recovery. However, the high inflation environment has led to increased spending by most corporations. Offset partially by increasing costs and demand, broadcasting companies continue to face declining market share due to streaming and cord-cutting. Despite this, broadcasting companies have a record of increasing growth and profits. Should you consider these three broadcasting stocks of Entravision Communications (EVC), Fox (FOXA) and Nexstar Media Group (NXST)?
Broadcasting Stocks Recent News
In 2022, the market declined significantly, with the S&P 500 index declining 18.1% on a total-return basis and the Dow Jones industrial average declining 6.9%. Some sectors significantly underperformed the market in 2022, like the S&P 500 Communication Services index declining 39.9% on a total-return basis. The market shifted out of growth-orientated stocks in favor of more defensive stocks and conservative investment strategies.
However, 2023 has seen a return to these stocks with high growth potential, with S&P 500 Communications Services up more than 27% for the year as of May 16, 2023, compared to the S&P 500’s increase of 8% over the same period. So far for the first quarter of 2023, 70% of the communication services sector stocks in the S&P 500 have reported earnings above analyst expectations.
There are many industries within the communications services sector, including broadcasting. The broadcasting industry is described as the owners and operators of television or radio broadcasting systems, including programming for radio and television broadcasting, radio networks and radio stations. Companies in this industry derive the majority of their revenue from advertising.
While the number of traditional cable TVs is projected to decline, the number of direct streams over the internet, also known as over-the-top media, is projected to continue to increase. The increase in affordable live television without the need for provider hardware or cable setups has caused the shift to streaming, and traditional broadcasting companies will be left in the dust if they do not adapt to meet ever-changing consumer tastes.
Most of the established broadcasting conglomerates have identified this trend and begun to increase their streaming efforts, purchasing access to streaming services or partnering with other companies in an attempt to increase consumer engagement across the board. Internet streaming is clearly the future of television, it is only a matter of time before companies begin to completely faze out their traditional methods of reaching consumers.
Grading Broadcasting Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three broadcasting stocks—Entravision Communications, Fox and Nexstar Media—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Broadcasting Stocks
What the A+ Stock Grades Reveal
Entravision Communications (EVC) is an advertising solutions, media and technology company. The company operates through three segments: digital, television and audio. Its digital segment, whose operations are primarily located in Latin America, Europe, the U.S., Asia and Africa, reaches a global market, with a focus on advertisers in emerging economies that wish to advertise on digital platforms owned and operated primarily by global media companies. The company’s television segment owns and/or operates approximately 49 primary television stations located primarily in California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Nevada, New Mexico, Texas and Washington, D.C. Its audio segment owns and operates approximately 45 radio stations, including 37 FM and eight AM stations, located primarily in Arizona, California, Colorado, Florida, Nevada, New Mexico and Texas. Its digital audio business provides digital audio advertising solutions for advertisers in the Americas.
The company has a Value Grade of B, based on its Value Score of 65, which is considered to be good value.
Entravision Communications’ Value Score is based on several traditional valuation metrics. The company has a rank of 17 for the price-to-sales (P/S) ratio, 28 for shareholder yield and 50 for the price-to-book-value (P/B) ratio. The company has a price-to-book ratio of 1.50, a shareholder yield of 3.0% and a 0.41 price-to-sales ratio. The price-to-sales ratio, price-to-book ratio (the lower, the better) and shareholder yield are significantly worse than the sector median.
The company has a strong Quality Grade of B based on a return on assets (ROA) rank of 63. Return on assets is a metric that shows how profitable a company’s assets are in generating revenue. Its return on assets is 2.1%, which is above the sector median of 1.7%. It has a strong F-Score rank at 74, and its F-Score of 6 is above the sector median of 4. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company.
Entravision Communications has a Growth Grade of B, based on its Growth Score of 71, which is considered strong. This is based on high quarterly sales and year-over-year operating cash growth ranks of 75 and 43, respectively. The company has a Momentum Grade of C, with a score of 49, which is considered average.
The company’s Earnings Estimate Revisions Grade of D with a score of 34 is considered negative. Investing based on analyst estimates looks for revisions in the consensus estimates as well as earnings surprises (actual earnings deviating from the consensus estimate). Academic studies have shown that companies with strong upward earnings revisions or that have reported significant earnings surprises can see an impact on share prices for up to one year.
The components examine the magnitude—using the standardized unexpected earnings (SUE) score—of a company’s earnings surprises for the last two reported fiscal quarters, as well as the change in the consensus estimate for the current fiscal year over the last month and last three months.
The SUE score measures the earnings surprise in terms of the number of standard deviations above or below the consensus earnings estimate. The absolute value of SUE measures the degree of unexpected earnings, and the sign of SUE indicates whether the unexpected earnings are above or below the consensus estimate. Entravision Communications’ most recent quarterly SUE score of –0.5 gives the company a rank of 28.
Fox (FOXA) is a news, sports and entertainment company. The company operates in three segments: cable network programming; television; and other, corporate and eliminations. The cable network programming segment produces and licenses news and sports content distributed through traditional cable television systems, direct broadcast satellite operators and telecommunication companies [traditional multichannel video programming distributors (MVPDs)], virtual multi-channel video programming distributors (virtual MVPDs) and other digital platforms, primarily in the U.S. Its television segment produces, acquires, markets and distributes programming through the Fox broadcast network, advertising-supported video-on-demand (AVOD) service Tubi, 29 full broadcast television stations, including 11 duopolies and other digital platforms, primarily in the U.S. Its other, corporate and eliminations segment consist of the Fox Studio Lot, which provides television and film production services and Credible Labs Inc.
The components of the Growth Composite Score consider a company’s success in growing sales on a year‐over‐year and long‐term annualized basis and its ability to consistently generate positive cash from its core operations. The company currently has a Growth Grade of A with a score of 97. The company has a five-year growth rate of 7.1% and has seen sales increase year over year for five consecutive years. Cash from operations has also been positive in the past five consecutive years.
The Value Score is the percentile rank of the average of the percentile ranks of the price-to-sales ratio, the price-earnings (P/E) ratio, the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA), shareholder yield, price-to-book ratio and price-to-free-cash-flow (P/FCF) ratio. The score is variable, meaning it can consider all six ratios or, should any of the six ratios not be valid, the remaining ratios that are valid. To be assigned a Value Score, stocks must have a valid (non-null) ratio and corresponding ranking for at least two of the six valuation ratios.
The company has a Value Grade of B with a score of 73, which is considered to be good value. Fox has a price-earnings ratio of 14.4, in line with the sector median of 14.3, giving the company a rank of 46. Fox currently has a shareholder yield of 9.6%, ranking in the eighth percentile of the stock universe.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher Quality Grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Fox has a Quality Grade of A with a score of 84. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets, return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its change in total liabilities to assets and F-Score. Fox has a buyback yield of 8.0% and an F-Score of 7. However, Fox is average in terms of its return on invested capital (aftertax net operating profit divided by total invested capital), in the 54th percentile.
The company has an average Momentum Grade of C with a score of 48, driven by strong relative price strength in the second and fourth quarters, offset by lower relative price strength in the first and third quarters. Fox has an Earnings Estimates Revisions Grade of D with a score of 39, which is considered negative. The company recently beat its quarterly earnings I/B/E/S consensus estimate; however, it has seen significant downward revisions from analysts.
Nexstar Media Group (NXST) is a diversified media company with television broadcasting, television network and digital media assets operating in the U.S. The company owns, operates, programs or provides sales and other services to 199 full-power television stations and one AM radio station. The company has a single segment, broadcast. The broadcast segment includes television stations and related community-focused websites that it owns, operates, programs or provides sales and other services to in various markets across the U.S. It provides NewsNation, which is a national cable news network; two owned and operated digital multicast networks and other multicast network services; and WGN, which is a Chicago radio station. The other activities of the company include operating The CW, digital businesses, corporate functions, the management of certain real estate assets, including revenues from leasing certain owned office and production facilities and eliminations.
Nexstar Media has an A+ Growth Grade of A with a score of 94, which is considered to be very strong. The Growth Grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company has seen sales increase on a year-over-year basis for five consecutive years, along with five consecutive years of positive cash from operations. Sales growth for the company has increased 16.5% on an annualized basis over the past five years, compared to the sector median of 6.2%.
Nexstar Media has a Momentum Grade of C, based on its Momentum Score of 47. This means that it ranks in the middle tier of all stocks in terms of its weighted relative strength over the last four quarters. This score is derived from a low relative price strength of –20.5% in the most recent quarter and –9.4% in the third-most-recent quarter, offset by high relative price strength of 14.7% and 9.6% in the second-most-recent and fourth-most-recent quarters, respectively. The scores are 36, 80, 38 and 73 sequentially from the first quarter. The weighted four-quarter relative price strength is –5.2%, which translates to a rank of 47. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a strong Quality Grade of A based on an F-Score of 8, which is above the sector median of 4. It also has a strong buyback yield of 10.2%. Nexstar Media has a Growth Score of 94, which is considered very strong. The company currently has an annual indicated dividend of $5.40, for a dividend yield of 3.3%.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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