Peter Longauer manages his own stock portfolio and contributes his assessments on various publicly traded companies to Seeking Alpha. On Friday (3/24), Longauer took his financial stethoscope and gave an extensive check-up on Townsquare Media.
“A brief overlook of the website left me with the impression that Townsquare is the hipster of radio broadcasting,” declared Longauer. “Judging from the trendy look of it the company is keeping up with the target audience/consumers, and that is a plus.”
But Longauer took a deeper look into Townsquare Media, and had something to say about its debt. Even with that blemish, Longauer calls Townsquare “a small cap radio company that deserves attention.”
Townsquare first attracted Longauer’s attention the week of March 13, when its stock shot up 25% following the release of stronger-than-expected Q4 2016 results.
“Since then the stock cooled down a bit and price corrected by roughly 10%, which presents a good entry opportunity,” Longauer notes. “Disregarding recent stock price increases I believe the price has plenty of room to go further.”
He elaborates, “If I look at the company’s fundamentals, projections, and its competitors, pretty much all of the metrics look favorable for the company, which still looks very cheap. It achieved more than 17% annual revenue growth over each of past few years and has current P/E of 13.89.”
While Longauer recognized Townsquare’s AM and FM station ownership and its selling of commercial time bringing in roughly 63% of the company’s net revenue, its entertainment segment represents “one of the good points.” Why? “The company has a chance to be more in touch with general public and its tastes through involvement in festivals, can better anticipate trends in music, and this experience and knowledge can reflect in better radio content for targeted audience.”
Longauer then took a close look at its revenue growth, and acquisition strategy.
“Revenue growth is the strongest part of Townsquare,” he says. Since 2014, following rapid growth, only two significant acquisitions were seen: it bought WE Fest for $23 million, and in September 2015 it bought “NAME” for $75 million.
This helped double Townsquare revenue while having no significant impact on the company’s debt.
“Townsquare has a potential and capability to grow revenue regardless of acquisitions,” Longauer says.
He also thinks 5% revenue growth is achievable.
But, there’s the debt that Townsquare must tackle, and Longauer examined it. As of the end of 2016, the company held long-term debt of $589 million, according to its latest 8-K filling. This breaks down into two parts: $300 million of notes maturing in 2023, and $289 million of term loans.
“Because only the [term loans are] susceptible to interest rate risk, raising rates wouldn’t pose that much of a threat,” he says. “One percent increase in LIBOR would cause $3 million increases in annual interest expense. Nevertheless, the company has too much debt.”
Townsquare isn’t blind to that, and this pleases Longauer.
“The good thing is that the management is fully aware of it and is proactively trying to reduce it,” he says. “Townsquare is targeting its leverage ratio, which stands currently at 4.9, to be 4 by the end of 2017. If that happens it would be a reassuring signal that it can meet its obligations in the future.”
Compared to some of its radio industry peers, the only issue for Townsquare is controlling its debt.
“Given the company’s large cash holding of $51.5 million, I don’t think liquidity is a threat to the company, but the solvency can be questioned if the debt gets out of hand,” Longauer says. “There have been too many cases of radio companies that crumbled under the heavy interest rates expenses, such as iHeartmedia, Emmis Communications or Radio One.
That lead Longauer to compare Townsquare to “its nearest competitors” — Beasley Broadcast Group, Entercom Communications and Saga Communications.
What did Longauer determine?
“Townsquare, compared to its competitors of the same size, looks cheap,” he says. “Almost all Townsquare fundamentals look better, some way better, than of its peers. Only two metrics are not in favor of Townsquare—income margin and indebtedness. Even though debt to EBIT is the largest among the peers, its EBIT to interests, which is interest expense coverage, doesn’t differ that much from Beasley’s or Entercom’s. As a matter of fact, Entercom looks like attractive stock too; however, its revenue growth cannot match that of Townsquare.”
Thus, Longauer concludes, “Townsquare is a small cap radio company that deserves attention. It has very attractive valuations, whether assessed independently or compared to the peers. It has had large annual growth and is still expected to grow in the future. The largest risk for the company is its indebtedness, although it doesn’t pose significant threat to the company.”