ETM – Entercom communications – A value opportunity

A few weeks ago I've mentioned how dirt cheap ETM was. Back then it was around 6.3$ per share, since then, price has continue its march downward to 4.8$ recently. Your loyal writer bought it all the way down, at 6.36$, 5.6$, 4.97$ and 5.1$. My average price is around 5.8$, relatively "high", since I was strapped in cash when prices lower than 5$ were available.

In this post I'd like to review the stock and tell its story.

ETM operates over 100 radio stations in 23 markets. The major source of revenue for ETM are spot commercials – or in other words radio commercials. ETM also expanded its network and it has internet broadcasting services and Radio stations website.

Radio may sound boring at first. It is. But it is one of the most effective way of reaching to your local audience and one of the most cost-effective way to do so. Radio advertising spot is cheap relative to other medias and much more focused. In a newspaper, you can just flip pages, ignore the commercials. But when you listen to your favorite radio show, and it is interrupted for a few commercials, many people just "listen them off". For instance, about a month ago, while driving in a car listening to a radio show that I like, I found out that a new super-market is opening in the area.

ETM's revenue comes mostly from local commercials, about 20% of its revenue comes from (US) national advertisers. The advertising firms are very diverse. For instance, nation wide advertisers (for the entire radio industry):

I like the Buffett connection 🙂

And if we look on a cross-industry wide section:

The top advertisers are actually local governments and other public services.

These graphs are from July 2011, but they can give you a nice idea what does the ads market looks like.

It's also nice to see that my favorite bank is on the top of  the radio advertisers list, showing how effective it is and how it is aimed to serve its community (but lets save that for a post about Wells Fargo):

 

Radio, like many other businesses, is tightly linked to the economy. When the economy contracts, less money is left to spend on advertising. Nevertheless, radio advertising shows resilience. The reason is that while there is less money left for advertising, cash-strapped companies turn to a cheap advertising media, like radio, and thus offsetting some of the decline in revenue. Another cause for radio advertising resilience are elections. One might think that elections happen once in 4 years, but in the US there are other types of elections – for example, state and local elections. Elections give a wide boost to radio revenue, especially local elections, and they are independent from the economy.

Another demonstration of Radio's advertising resilience is the passing decade – 2000-2010. In this decade, many advertising medias went through transformations and declining demand as media market expanded and created new fields – like Internet advertising, electronic newspapers, electronic billboards, even spam email. As Buffett once said – 600 million eyeballs and 24 hours a day is all that you have (US market). Even though advertising market conditions deteriorated in the last decade, newspapers went bust and revenues declined, radio market share remained relatively constant (slides 9-11). I think the reason is that there are times in day in which you can only listen to radio and nothing else can replace it – for instance in your car while driving to work.

Radio businesses are media businesses. In the media  business one must grow all the time, buying its competitors to eliminate them from the market. During the early 2000's, The radio companies, all of them, bought radio stations at very high rates. Sometimes, the rates were exorbitant. As radio equipment is cheap (we'll get to that), there was a significant amount of goodwill written on those companies' books. On the other side of the balance sheet the radio companies built a mountain of debt.

For every non-economic move "pay day" eventually comes. The recent market turmoil caused radio revenue to decline, resulting in a lower cashflow to serve this huge debt-pile. On top of that, banks that were once happy to lend to everyone, became overly strict and now lent money at very high rates, if at all. This placed radio companies between the nail and the hammer – their cash flow weakened and the cost of maintaining their debt pile increased.

As anticipated, many of the very leveraged ones went bankrupt, for instance – Regent communications, Citadel communications, and others. Others just declined in price and fight to survive. But there are also radio companies that acted more prudently and responsibly, maintained a relatively strong balance sheet and strong cashflow throughout the period. An example is ETM.

	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999	1998	1997	1996	1995
Revenue	391,447	372,432	438,822	468,351	439,629	431,799	422,826	400,470	391,289	332,897	352,025	215,001	132,998	93,862	48,675	35,893
Operating cashflow, adjusted to changes in working capital	94,574	82,836	108,692	113,602	111,062	131,417	138,049	136,982	118,590	93,933	93,611	52,066	26,625
Operating cashflow margin, adjusted to changes in working capital	24.16%	22.24%	24.77%	24.26%	25.26%	30.43%	32.65%	34.21%	30.31%	28.22%	26.59%	24.22%	20.02%
Property purchase (CAPEX)	2,744	2,467	8,553	9,281	13,713	12,671	9,624	13,708	10,136	9,820	9,532	14,357	8,571
Station deposits and costs	1,350	0	-4,149	-1,419	1,245	900	-275	-27,997	30,534	1,886	-524	885	2,394
Purchase of radio stations	0	0	374	268308	30004	45091	98803	123442	235229	0	100733	763068	219707
Sale of assets	151	106	33,991	97	337	14,290	1,144	4,649	2,049	0	0	75,000	84,672
Share count	37,679	36,402	36,782	38,229	40,204	46,221	50,534	51,607	49,765	45,994	45,614	37,992	24,104
Bank Debt	650,148	729,173	750,197	823,718	526,239	427,259	333,276	244,043	286,715	388323	461260	465,760	330,271
Notes Debt	12,610	19,189	83,500	150000	150000	150000	150000	150000	150000	0	0	0	97,272
Total Interest bearing debt	662,758	748,362	833,697	973,718	676,239	577,259	483,276	394,043	436,715	388,323	461,260	465,760	427,543
CF without purchasing radio stations	91,830	80,369	100,139	104,321	97,349	118,746	128,425	123,274	108,454	84,113	84,079	37,709	18,054
CF per share	2.437166591	2.207818252	2.722500136	2.728844594	2.421375982	2.569091971	2.541358293	2.388706958	2.179322817	1.828782015	1.843271803	0.992551063	0.749004315

See also this excel file till I'll understand how to fix this table.

As you can see from the table, the company was hit by the financial crisis in 2008-2009 but not as much as one would expect. Actually it exhibited resilience and could easily continue and support its debt.

You can see many transactions the company did during the 2000's by buying many stations that did not increase revenue or cash-flow per share significantly. This clearly shows that this is not a brilliant company, as it consumes a lot of cash in non-economical expeditions. Nevertheless, the company is cheap. It generates a rather steady cash-flow of over 2$ per share in the last decade, and the stock is traded around 5$ these days. In the last 4 years (almost) there was ZERO investment in buying stations and cashflow per share did not decrease materially. If in some day they will decide to distribute 50% of the cash flow to shareholders, we are looking at 20% dividend yield return. During 2006 and 2007, right before the financial crisis, the company did distribute a dividend of 1.52$ per share, or a whopping 30% yield on the price today.

So, given the history of bad financial calls management had done in the last decade, why do I like this company?

The reason is that it is not only dirt cheap, it is also being controlled by the bank, de-facto. One of the good outcomes of the financial crisis is the tightening of debt conditions. Before the financial crisis, if you had 2 legs and a nose you could get a decent loan. Now, even creditworthy companies work hard to get credit. ETM is no exception.

The bank set a strict covenant on the loan and ETM is hovering above the covenant. They are not close to breaching it, but they are too close to it. This prevents them from going wild "like in the good'ole days" and starting a shopping frenzy that gets the company nowhere. Now, if they have some spare money, they must think hard before spending it on buying stations. The good thing is that even if they will continue doing stupid acquisitions, they cannot spend huge sums as before, only small amounts in order for them not to breach the covenants.

An additional positive is that the Field family holds almost 9% of the company, so they have some skin in the game. David Field is the company's CEO. He also has lots of RSU's that can increase his holding in the company substantially (and dilute others). Nevertheless, dilution is painful but not as problematic as the company is very cheap as it is – about 1 million shares addition, less than 3%. Moreover, since most of his compensation is in company's stock, he has a clear interest to raise the share price (someone said buyback / dividend?).

Finally, the Fields and other directors in the company started buying shares at the open market. Last time they did so was at August 2010, guess what was the price then (5$), and since then the share visited 13$. A negative here will be that back then they bought much more than today – 30,000 shares up till today comparing to 228,500 shares back then.

Another big advantage is that next year is a presidential election year, a period that is known for its good treats to radio companies that enjoy a potent demand for airtime by politicians.

A close obstacle coming from the debt side will be the need to refinance the credit facility at the end of June 2012. The question is not "IF" they will succeed to refinance it but under what terms. I think their interest rate will pick up but not significantly. Currently they pay around 20 million dollars of interest annually, a little over 3%. Even if interest will double (and I doubt it) we are still looking on a company that generates an operating cash-flow of above 75 million dollars per year, or about 1.8-1.9$ cash flow per share, or a multiple of 3. This is insanely low.

 In the meantime, the company does what it did best in the last decade – repay its debts. Since 2007, the debt pile has decreased dramatically. As the debt diminishes, so does interest that needs to be paid. That in turn will increase operating cash flow.

It is possible that in the forseeable future the company will resume paying dividends. If it does, it can serve  as a strong catalyst and the stock might run to a more reasonable pricing levels that can be as high as 12-13$ per share and if economy improves, even 20$ is not a dirty word (but i'd sell much before 20$).