Entercom Communications has a new reason to be optimistic about a resurgence in its languishing stock price. On Wednesday, B. Riley FBR analyst Zack Silver initiated coverage of the radio broadcasting company’s stock by giving it a “Buy” rating and setting a $7.75 price point.
Silver elaborated on his recommendation, while also offering an investment thesis every broadcast media C-Suite executive should read.
In making his recommendation, Silver says, “We see ETM shares as mispriced even after factoring a near-term economic downturn into our valuation framework.”
That’s because B. Riley FBR is bullish on AM and FM.
“For radio broadcasters in general, we are intrigued by the idea of a ‘radio renaissance’—healthier industry dynamics (two major players exiting bankruptcy), continued durability in audience reach, new growth opportunities with podcasting/streaming and sports betting, and a call option on deregulation,” Silver writes.
However, despite his firm’s enthusiasm, core advertising, which comprises over 75% of industry revenues, has been sluggish. And, it would likely deteriorate further in a downturn, Silver reasons.
Even if a recession were to transpire in mid-2020 as many believe will occur, B. Riley FBR’s analysis suggests that the shares “are significantly mispriced even after factoring in the impact of a near-term moderate recession.”
Moreover, “while we are comparatively neutral on the overall radio broadcasting industry, we believe ETM is best positioned to take advantage of a potential radio revival given its relatively low exposure to music-only stations, large market concentration, post–CBS Radio scale benefits, attractive digital offering, and lower leverage than the peer group.”
Silver’s commentary about “relatively low exposure to music-only stations” is intriguing. While WCBS-FM, KROQ-FM, KRTH-FM and WBBM-FM are among Entercom’s biggest music-focused assets in markets where it gained CBS Radio stations and much of its pre-merger stations were music stations, Entercom is also a major hub of sports talk programming. It also owns the nation’s biggest all-News radio stations. With Radio.com getting relaunched, it is widely believed that its spoken word assets will drive growth of the digital and online platform.
“Entercom is our preferred pick in the group because it generates around 40% of its revenues from non-music content and is much less exposed to new music entrants than peers,” Silver declares.
LATE CYCLE OVERSHOOT
Pro forma for the remaining CBS Radio synergies, Entercom trades below 5x free cash flow.
Silver says, “We see this valuation as an overreaction to secular pressures for a company that has produced more durable audience trends than many legacy media peers. Entercom generates virtually all of its revenues through advertising and is certainly exposed to cyclical risks. But, we believe the market has overshot the impact an economic downturn would have on Entercom’s equity value. Even after factoring in a moderate recession during our forecast period, we still see 30% upside potential. Moreover, we believe the risk/reward skews favorably based on current levels. We see only 20% downside in a draconian scenario of a 2008/2009 repeat and over 90% upside assuming no recession between now and 2025.”
At the same time, amplifying late cycle advertising and leverage exposure fears are unfavorable trading dynamics. Silver and his team see this dissipating soon. Specifically, they believe iHeartMedia investors are hedging their exposure to radio as they await iHeart’s forthcoming IPO by shorting Entercom, which is the most liquid radio stock.
“We believe that this dynamic has sidelined new Entercom investors but that this headwind is reaching a conclusion and has helped to create an attractive entry point at current levels,” Silver says.
Lastly, Silver believes “meaningful radio station ownership regulation modernization by the middle of 2020” will happen. This could provide a boost to radio broadcaster multiples, he reasons.
Silver’s comprehensive report also offers the question of whether or not it is “time to tune back in to radio.” He says, “Radio, in our view, is perhaps the most misunderstood advertising medium on the planet. Despite facing a wave of Internet-driven disruption over the better part of this century, radio still reaches more Americans than any other platform, with 229 million adults tuning in weekly.”