Over the past six months, Gray Television has been a great trade, beating the S&P 500 by 10.2%. Its stock price has climbed to $4.81, representing a healthy 22.1% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Gray Television, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Do We Think Gray Television Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Gray Television. Here are three reasons there are better opportunities than GTN and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal 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 tepid 9.1% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Gray Television, its EPS declined by 29.8% annually over the last five years while its revenue grew by 9.1%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Gray Television’s $5.71 billion of debt exceeds the $182 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $871 million 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
Gray Television doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 0.6× forward EV-to-EBITDA (or $4.81 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of Gray Television
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