Image Source: Pandora
Valuentum is dropping coverage of the radio broadcasting industry to allocate resources elsewhere. We will retain coverage of Sirius XM (SIRI) in the media – entertainment industry.
Structure of the Broadcasting (Radio) Industry
Firms in the broadcasting (radio) industry provide satellite radio services, Internet radio services, and operate commercial radio stations. Constituents compete for both listeners and advertisers. Satellite radio providers generate revenue via subscription fees, primarily distribute radios through the sale/lease of new automobiles, and face competition from free traditional AM/FM radio and online-only providers, which make digital streams available through the Internet for free. The industry is characterized by rapid change, and competition will keep any outsize profits to a minimum. We don’t like the structure of the group.
Entercom (ETM)
Entercom’s merger with the recently spun-off CBS radio should help it compete more effectively for advertising dollars, but we’re not ignoring its massive debt load.
Entercom is one of the five largest radio broadcasting companies in the US with a nationwide portfolio that reaches nearly 90% of people aged 12 and older in the top 50 markets. The company is purely focused on radio and boasts a solid platform. It was founded in 1968 and is headquartered in Pennsylvania.
Entercom merged with the recently spun-off CBS Radio, creating the second-largest radio owner in the US. The company reaches and engages with over 100 million people each week with unique local content, and its reach in top markets is among the best in the industry.
Entercom is the unrivaled leader in sports radio as it is home to more than 40 pro teams and dozens of top college programs, and its presence in digital, events, and podcasting gives it a hedge against the decline of terrestrial radio. The CBS deal enables it to compete more effectively for ad dollars, and management is targeting $100 million in cost synergies within 18 months of closing.
Social media use is increasing in younger generations, but the Internet holds only 15% share of the time that consumers spend with all media. TV is still the dominant media use, but AM/FM radio has a solid ~20% share of all consumer media minutes. More than 90% of consumers have used radio within any 7-day period, more so than any other medium.
Entercom’s value drivers include sustainable growth from execution of strategy, revenue and margin improvements from new acquisitions, digital growth initiatives, and the opportunity to refinance into cheaper capital structure. Its debt load should be watched closely.
Our published fair value estimate range for Entercom’s is $7-$15 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Neutral.
Pandora (P)
Pandora has been acquired by Sirius XM.
Pandora is the leader in Internet radio in the US, offering a personalized experience for each of its listeners. The firm has pioneered a new form of radio – one that uses the qualities of music to create stations and then adapts playlists based on the individual feedback of each listener. The company was founded in 2000 and is headquartered in Oakland, California.
The growth rate of the number of Pandora’s active listeners should be watched. Apple Music, Spotify and others could pressure growth in the future and may stop it altogether. However, we like management’s shift in focus to ad revenue growth over active listeners.
Speculators in Pandora’s stock should expect the equity to be highly volatile around quarterly report releases. Pops and drops of 20% or more have not been uncommon. With a company whose future is very uncertain, the market continues to have a difficult time getting a handle on its business. Other events such as takeover speculation also have the potential to move shares meaningfully.
Pandora recently launched an organizational restructuring program aimed at prioritizing strategic growth. It will shift its focus to ad-tech and audience development efforts in hopes of driving operating leverage over time. Job cuts and other cost-saving measures are expected to result in $45 million in annualized adjusted EBITDA savings.
The firm has more than a 60% share of Internet radio among the top 20 stations and networks. Competition remains fierce for both advertisers and listeners, however, and content costs are not cheap. Its business model remains largely unproven, in our view.
Our published fair value estimate range for Pandora’s is $5-$14 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Attractive.
Saga (SGA)
More than 80% of Saga’s gross revenue is generated from the sale of local advertising, but it depends on key personalities and stations that can be affected by outside forces.
Saga’s strategy is to operate top billing radio and television stations in mid-sized markets. Saga’s radio stations employ a myriad of programming formats, including Classic Hits, Adult Contemporary, Active Rock, Oldies, News/Talk, Country and Classical. The company was founded in 1986 and is headquartered in Michigan.
More than 80% of the company’s gross revenue is generated from the sale of local advertising. The company strives to maintain a local sales force that is generally larger than its competitors in all of its markets.
Saga’s success depends on a variety of factors that are out of its control. The firm depends on key personalities and stations that can be affected by outside forces. It also depends on its ability to identify, consummate and integrate acquired stations, which will be key for accelerating growth.
Saga has an excellent combination of strong free cash flow generation and low financial leverage. We expect the firm’s free cash flow margin to average about 14.8% in coming years. Total debt-to-EBITDA was 1 last year, while debt-to-book capitalization stood at 12.2%.
Saga recently sold its television stations to the Evening Telegram Company for ~$67 million, and it also purchased 8 radio stations serving what it calls attractive markets in South Carolina for ~$23 million. Both heritage and developmental radio stations were acquired in the deal.
Our published fair value estimate range for Saga’s is $34-$52 per share, with a Valuentum Buying Index rating of 3 and an Economic Castle rating of Attractive.
Townsquare Media (TSQ)
Townsquare Media’s ‘Local Marketing Solutions’ segment offerings target small and mid-sized markets across the US, which helps it develop strong relationships with local advertisers.
Townsquare Media operates as a media, entertainment, and digital marketing services company in the US. It owns and operates radio stations, digital and social properties, and live events. It also offers audience original entertainment, music, and lifestyle media. The company was founded in 1996 and is headquartered in Connecticut.
As of 2017, Townsquare Media operated ~310 radio stations, over 325 search engine and mobile-optimized local websites, and operated approximately 350 live events per year. The firm’s revenue per audience member outpaces its peer average.
Townsquare Media should continue to prioritize deleveraging. As of the end of 2017, its net debt-to-LTM adjusted EBITDA sat at 5.2x, which is higher than its medium- to long-term target of 4.0x. Additional acquisitions can be expected, however, causing us to keep an eye on its debt load. The company recently initiated a quarterly dividend, a move we are not fond of given its debt load.
Townsquare Media’s ‘Local Marketing Solutions’ segment offerings target small and mid-sized markets across the US, which helps it develop strong relationships with local advertisers. Its markets are generally underserved in terms of high-quality media and entertainment and have a limited focus from large media players.
Townsquare’s inorganic growth strategy includes a focus on high ROI investment in its ‘Local Marketing Solutions’ segment where it has a sustainable competitive advantage. It will continue to develop and test innovative products across its local footprint.
Our published fair value estimate range for Saga’s is $7-$15 per share, with a Valuentum Buying Index rating of 6 and an Economic Castle rating of Neutral.