We came across a bearish thesis on Gray Television, Inc. (GTN) on Enterprising Investor’s Substack by Tyler Moody. In this article, we will summarize the bears’ thesis on GTN. Gray Television, Inc. (GTN)’s share was trading at $4.69 as of Nov 15th. GTN’s trailing and forward P/E were 3.13 and 1.13 respectively according to Yahoo Finance.
A television broadcaster preparing a new Spanish-language program for its viewers.
Gray Television (GTN) presents a highly risky investment, burdened by structural industry challenges, an alarming debt load, and reliance on a volatile revenue stream. While its valuation, trading at a price-to-book value of 0.25, may initially appear enticing, a closer examination reveals deeper issues that undermine its investment case. The company, with a $500 million market cap, operates in the declining broadcast TV business, a “melting ice cube” industry facing waning viewership and ad revenue as digital platforms dominate.
One of GTN’s most glaring vulnerabilities is its excessive debt. With $5.9 billion in long-term debt versus $2.7 billion in equity, its debt-to-equity ratio stands at an eye-watering 2.2. Even more concerning, its trailing twelve-month (TTM) EBITDA of $1.06 billion results in a debt-to-EBITDA ratio exceeding 5.5—levels that typically spell danger in industries lacking growth. The bulk of this debt stems from acquisitions, including a $2.6 billion purchase in 2019 and a $3.3 billion deal in 2021, which have added $2.6 billion in goodwill to the balance sheet. Notably, this goodwill represents almost all of GTN’s equity, rendering the low price-to-book ratio highly misleading. Stripping out goodwill shows GTN trading at approximately 2.5 times book value, which is far less attractive and highlights limited underlying asset value.
The cyclical nature of GTN’s revenue exacerbates its precarious position. Election years provide temporary boosts to political ad revenue, a critical income source. In 2022, GTN benefited from midterm elections, generating nearly $1 billion in operating income. However, revenue and operating income plummeted in 2023 to $450 million, a stark reminder of the inherent volatility. Compounding the issue, GTN’s interest expense has surged to $480 million annually, leaving the company in a precarious position during off-election years where it struggles to cover interest payments. Management’s strategy of using excess cash from election cycles to chip away at debt hinges on political ad spending remaining robust, which failed to materialize this year, further eroding confidence in its financial health.
Broadcast TV’s decline as an advertising medium casts doubt on GTN’s long-term viability. The company’s reliance on a shrinking audience and outdated technology puts its core operations at risk of becoming obsolete. Additionally, while management holds out hope for industry consolidation, betting on regulatory changes under a potential Trump administration to facilitate buyouts is speculative at best. Even with favorable conditions, GTN’s massive debt load and questionable asset quality make it an unattractive target.
In its current state, GTN offers little margin of safety. The supposed undervaluation based on price-to-book is an illusion once goodwill is accounted for, and the company’s heavy reliance on cyclical political ad revenue creates significant earnings volatility. For now, GTN remains a speculative play with a high-risk, low-reward profile. Investors would be better off waiting for meaningful debt reduction or clear signs of operational improvement before considering an entry.
Gray Television, Inc. (GTN) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 24 hedge fund portfolios held GTN at the end of the third quarter which was 22 in the previous quarter. While we acknowledge the risk and potential of GTN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GTN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.