Entercom is a pure play radio station operator with strong free cash flow and a solid balance sheet. Trading at approximately 12.4x 2006 after-tax free cash flow per share, the company maintains industry leading margins and should continue to deliver significant free cash flow growth despite the noise around competitive threats, technology concerns, and slowing advertising growth. We believe the company has limited downside with upside of approximately 30-40% over the next 12-18 months.
Entercom is the nation’s fourth largest radio broadcasting company (2004 net revenues of $423mm), with a focus on the larger top 50 markets, where over 60% of its stations are located and nearly 85% of revenues. Its top 10 markets represent approximately 80% of its total revenues, and the company holds a #1 or #2 position (which is critical for pricing) in nine of the ten markets. Its largest markets are Seattle, Boston, Kansas City, Sacramento, Portland and Denver.
The company generates approximately 75-80% of its revenues from local advertising (which is critical for pricing), approximately 20% from national advertising, and the balance from network compensation, radio station events and rental income from tower sites.
Like the rest of the radio broadcasting industry, Entercom has recently seen its share price decline due to perceived competition from non-traditional channels, such as satellite radio, cellphone technology, IPods, etc. However, the company continues to generate significant free cash flow in the face of these threats, and continues to maintain, and even grow, revenues. A “homerun” bull case would warrant a greater discussion of/view on this topic, but our main attraction to this investment is the limited downside – i.e., even if you assume flat same station revenues, or marginally declining ones, there is a margin of safety. At the end of the day, this is a high quality business, with incredibly high barriers to entry and scalability within particular markets.
During the quarter ended September 30th, the company saw same stations net revenues increase 3%, and a corresponding same station expense increase of 2%, resulting in an EPS increase of 17%, to $0.48. Normalized after tax free cash flow per share (excluding WC) was $0.75. As more fully set forth below, the company benefits from a large tax shield. For the fourth quarter, the company guided same station net revenues of flat to -2%. This is in large part affected by (i) the prior year’s net revenues benefiting from $4mm in political revenues and additional Boston Red Sox post-season games, and (ii) New Orleans (which represents 6% of the company’s revenues) continuing to experience the disruptive effects of Hurricane Katrina.
Entercom has undertaken several growth initiatives recently, including brand development, moving more advertising to 30 seconds (versus 60 seconds), and SHRED (which is targeted towards migrating more advertisers from newspapers to radio)
During the first week of October 2005, Entercom completed the acquisition of three stations in South Carolina in the amount of $45mm and disposed of three stations. Also during October, Susquehanna Media (the nation’s largest closely held radio operator by revenue) agreed to sell its radio assets to a group led by Cumulus Media for $1.2bn, or (according to some estimates) 12-13x EBITDA. The next large deal expected in the industry is the sale of Walt Disney’s radio assets including ABC Radio.
The Chairman (Joseph Field) and CEO (David Field) own approximately 25% of the shares outstanding, but have voting control of 69%.
The company benefits from a large tax shield which should shield approximately $37-$38mm of taxes per year through 2012.
At $32, the company has a market cap of $1.5bn, with net debt of approximately $490mm, or an enterprise value of $1.99bn. 2006 EBITDA should be approximately 180mm, creating the company at 11.1x. If you capitalize the tax shield (call it $200mm), that would create it at 10.0x which is a significant discount not only to the historical numbers but the sector in general. Given that the company is relatively overcapitalized, there is eps accretion value from potential buybacks, restructuring, etc (more below)
Accordingly, 2006 after tax free cash flow estimates would be as follows:
Thus, on an ATFCF/Share basis, at 12.4x, the company is again trading at a discount to its historicals as well as the industry in general.
Although the company could overpay for the Disney assets, based on its past success in integrating and creating value in acquisitions, as well as the fact that it didn’t chase the Susquehanna assets, we believe that is unlikely. Moreover, management, while admitting that it is interested in buying Disney’s assets, has stated that it would do so only at a price that makes sense for shareholders.
As mentioned above, the management team has more skin in the game than any other company in the industry, and Entercom has recently demonstrated its commitment to enhancing shareholder value – purchasing in Q4 ’04 and Q1 ’05 a combined 5.6mm shares at an average price of approximately $36.60 per share. In the second quarter, the company halted the buyback program as it announced on August 7th that it was looking at purchasing some major assets. If the company does not acquire the Disney assets, it is highly likely that they will continue their buyback program, especially given the current level of the stock. Other options include going private and a complete restructuring of the capital structure.