Gray Television has had an impressive run over the past six months as its shares have beaten the S&P 500 by 33%. The stock now trades at $4.86, marking a 38.9% gain. 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.
Why Do We Think Gray Television Will Underperform?
We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons why we avoid 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. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Gray Television grew its sales at a 11% 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. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Gray Television’s revenue to drop by 11.6%, a decrease from its 11% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Gray Television’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 10.1% for the last 12 months will decrease to 3.9%.
Final Judgment
We see the value of companies helping consumers, but in the case of Gray Television, we’re out. With its shares beating the market recently, the stock trades at 0.9× forward EV-to-EBITDA (or $4.86 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Gray Television
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