Discover more from Rate of Return by Austin Hankwitz
🥱 Boring Stock Ideas
Security and broadcasting..
First and foremost, I really appreciate everyone’s patience regarding these continued stock ideas and macro-economic updates.
Instead of a Week in Review this Sunday, I’ll be sharing a rather quick macro update before pitching you two new stock ideas.
Christian and I do our best to ensure we publish The Investing Week Ahead and Week in Review in a timely manner every Monday morning and Sunday afternoon, but sometimes we fall behind on the macro updates.
We’ll be spending time this coming week pulling one together, but for those who can’t wait that long our thoughts are below:
We’re not yet officially in a recession despite continued layoffs, bank failures becoming a common occurrence, and numerous economic indicators pointing in the wrong direction.
Weirdly enough, the stock market is trading as if everything is going according to plan.
Again, this is mainly because 88% of the YTD returns can be attributed six companies inside of the S&P 500 — I’ll let you guess who they are.
🥱 Introducing Boring Businesses
Have you all ever heard of the term “boring business?”
Essentially, they’re businesses we all take for granted — like sprinkler repair, boat rentals, or even laundromats.
It turns out these types of businesses exist on the public markets as well — in this post I’m going to dive a bit deeper into my favorites.
As always, I’ll introduce the business, walk you through exactly what they do and how they make money, then I’ll share why I’m particularly excited about them for the coming 12-18 months.
⚡️ Napco Security Technologies (NSSC):
Napco Security Technologies is one of the leading manufactures and designers of electronic security devices, communication infrastructure for intrusion alert systems, and a leading provider of school safety solutions.
This company manufactures and designs an array of products (access control systems, door-locking products, intrusion and fire systems, video surveillance) specifically designed to keep people safe.
Their products are made for residential, commercial, institutional, industrial, and government use. They’re sold worldwide through independent dealers and other distributors of security equipment.
Today, millions of businesses, institutions, homes, schools, and people around the globe rely on Napco for their protection.
👉 What they do & how they make money
Think about it — every public place you walk into likely has door-locking mechanisms, fire alarm systems, and other security products to ensure safety.
This company is one of the few out there that actually manufacture and design them — then through thousands of independent dealers and distributors, sell them to be retrofitted inside of residential, commercial, government, and institutional properties.
They have a few specific product lines:
Alarms & Connectivity
The graphic below does a great job illustrating how these three product lines are incorporated into your average commercial property (hospital, school, restaurants, etc.)
The company makes money in two ways — selling security products and selling a subscription to maintain wireless connectivity for the security product (hence their growing monthly recurring revenue).
The company has done a wonderful job of growing their revenue over the years (shown above) — especially since Covid.
Their revenue has grown at a +20% compounded annual growth rate since 2020, and their recurring subscription revenue is growing at nearly +40% compounded annually (a very good thing).
This revenue growth is expected to continue to move in the right direction as we see more security funding initiatives announced from states like Ohio and Missouri — where 793 schools will receive $112M worth of security upgrades.
Who do you think that money is being paid to? Companies like this one.
👉 Why I’m excited
A few reasons — with the most exciting reason being their track record. Before Covid flipped the world upside down, Napco reported 23 consecutive quarters of growth for the business.
Since getting their feet back underneath of them after Covid subsided, they’ve reported 10 consecutive quarters of growth — and “look forward to surpassing [their 23 quarter] streak in the future.”
According to analyst projections (and affirmation by the company’s management team), growth is expected to continue to move in the right direction for years to come as shown by the blue line below.
And at $33.63 / share — their stock seems to be priced to perfection, with upside of +67% to be realized in the coming 18-24 months.
I’d also argue this company is recession-proof, with 80% of their customers being commercial businesses that need fire alert systems to even be “up to code” and receive a certificate of occupancy.
Finally, like many other successful businesses we like, they’re currently offering a “glimpse into the future” by providing financial guidance for 2026:
$150M in annual recurring revenue (80% margins)
$150M in annual equipment revenue (50% margins)
$135M in adj. EBITDA
Considering their stock price likes to trade between 25-30X adj. EBITDA, we’re looking at a potential price tag of $3.7B on the stock — right now it’s $1.2B.
That’s a 3X in stock price assuming historical valuations maintain.
I like the stock.
Nexstar Media Group (NXST):
Nexstar Media Group is a leading media company with television broadcasting, television networks, and digital media assets operating in the USA.
In 2022, they owned, operated, programmed, or provided sales and other services to 200 TV stations and one AM radio station.
Essentially, they’re a broadcast television company with a lot of “tentacles” touching several diversified industries.
Their 200 TV stations reach more than 100+ American media markets — and the best part is that they’re not aligned with a single major TV network.
ABC — 29 TV stations
NBC — 35 TV stations
FOX — 42 TV stations
CBS — 49 TV stations
They also own minority stakes in the Food Network and the Cooking Channel along with various other digital properties.
In addition to all of that, they own and operate NewsNation — whom they claim to be one of the fastest growing national cable news networks.
👉 What they do & how they make money
Despite TikTok, YouTube, Instagram, and other social media platforms dominating the attention of hundreds of millions around the country, Nexstar’s earnings per share (EPS) grew from $0 in 2014 to $24 in 2022 — but how?
Industry Consolidation (Nationwide Footprint)
As you could imagine, over the last several years (perhaps decades) cable television has been on the way out. Because cable television is no longer a “secular growth trend,” investors assign lower and lower valuations to these types of companies.
Because of these lower valuations, it’s very easy (and cheap) for the larger players like Nexstar to swoop in and buy out their competitors — for example, Nexstar added +65 stations to their operating in 2017 with the Media General purchase, and another +31 in 2019 with their Tribune deal.
Growth by acquisition.
It’s no secret politics have become increasingly heated over the last decade or so — and I’d even argue since the pandemic people are especially interested in political elections and outcomes.
While political advertising is still largely regulated on Facebook and Twitter (but still possible nonetheless), broadcast TV remains a massive advertising avenue during political elections.
TV advertising also gives political campaigns a well-targeted means of going after voters living in specific geographical areas. With this “trend” picking up more and more steam since Trump took office in 2016,
Now this has been a major driver of revenue growth for the company. FCC regulations force paid TV operators (such as cable networks and streaming channels) to carry local retransmissions of TV broadcast channels.
For example, if you live in Milwaukee your cable operators have to provide the Milwaukee version of CBS instead of their national feed.
Nexstar received compensation from cable, satellite, and other operators in return for their consent to the retransmission of the signals of their television stations (including NewsNation).
This compensation increased tremendously over the years as more subscribers tuned into their networks, they were able to renegotiate better rates, as well as scheduled annual escalation of rates per subscriber.
Finally, Nexstar also generates revenue on their digital assets — mainly the websites and apps tied to its local TV stations. They also purchased The Hill for $130M — another advertiser-supported platform.
👉 Why I’m excited
A few reasons — all fundamentally-driven.
They just hiked their dividend by +50% and returned 68% of 2022’s free cash flow back to shareholders in the form dividends, debt paydown, or share repurchases.
Their free cash flow is also supposed to climb by +55% in 2024 (mainly driven by political advertising revenue) — which will likely be used to moderately raise their dividend again, repurchase shares, and pay down more debt.
Assuming their retransmission guidance stays in tact (making up more than 50% of their annual revenue), the company is currently trading around 6X 2023 adj. EBITDA — all while producing a 21% free cash flow yield.
Nexstar Media Group will have a banner year throughout 2024 — likely resulting in FCF per share around $45-47.
When you apply their historical 5X multiple on that number, you arrive at $225 / share — representing +42% in potential upside.
Unlike Napo Security, Nexstar Media has a ton of variables (both a good and bad thing) — which means there is increased risk. Given this increased risk, I’ll likely have a relatively neutral-weighting on the stock — while an over-weight on Napco.
I’m really excited for both of these companies — especially as we live through major business catalysts for both of the names in the coming 18-24 months.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.