What a brutal six months it’s been for Gray Television. The stock has dropped 26.9% and now trades at $4.52, rattling many shareholders. This might have investors contemplating their next move.

Is now the time to buy Gray Television, or should you be careful about including it in 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 more favorable entry price, we’re cautious about Gray Television. Here are three reasons why GTN doesn’t excite us, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Gray Television’s sales grew at a weak 4.8% compounded annual growth rate over the last five years. This fell short of our benchmark for the consumer discretionary sector.

2. New Investments Aren’t Moving the Needle

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

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

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 $5.89 billion of debt exceeds the $176 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $688 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. After the recent drawdown, the stock trades at 6.1× forward EV-to-EBITDA (or $4.52 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.

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