Over the past six months, Gray Television has been a great trade, beating the S&P 500 by 18.2%. Its stock price has climbed to $5.60, representing a healthy 21.6% increase. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Gray Television, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Gray Television Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons why GTN doesn't excite us 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. Regrettably, Gray Television’s sales grew at a weak 5.4% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.
2. New Investments Aren’t Moving the Needle
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Gray Television’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
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 $5.83 billion of debt exceeds the $368 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $648 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 falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 1.7× forward P/E (or $5.60 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Gray Television
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