What a time it’s been for Gray Television. In the past six months alone, the company’s stock price has increased by a massive 66.1%, reaching $6.13 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Gray Television, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Gray Television Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Gray Television for now. Here are three reasons we avoid GTN and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Gray Television grew its sales at a 11.3% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Gray Television’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 9.5% for the last 12 months will decrease to 7.5%.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Gray Television’s $5.67 billion of debt exceeds the $199 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $1.05 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Gray Television could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Gray Television can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Gray Television, we’ll be cheering from the sidelines. Following the recent rally, the stock trades at 0.8× forward EV-to-EBITDA (or $6.13 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
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