Cumulus Media Inc. (NASDAQ:CMLS) stock has been strong along with the rest of media sector but questions about the investment thesis after the run up are a bit premature and stock might still have room to grow since recent results, debt refinancing and announcements have merely confirmed two broad themes at play worthy of a shareholder's notice
- Financial engineering benefiting the shareholders
- Strategic business transition deserving a higher multiple
Recent stock movement is merely a confirmation of the these trends and an in-depth study of the same should attest that there are both near-term catalysts and long-term trends to note on the fundamental business side besides looking for some "juice" left after the recent run up.
Fundamental revaluation of the franchise by the investors makes it worthy of both price appreciation & multiple expansions and stock trend is merely reflecting the same. Recent stock offering, which was the first issuance of common equity by a radio broadcaster in 9 years and was 2x oversubscribed, may provide solace to the new investors to the name.
Cumulus Media and the radio market
Cumulus Media Inc. (CMLS) is the largest independent radio broadcaster in the U.S. with 520 stations and presence in 8/10 top markets. Over the last few years' company has been a consolidator in the radio broadcasting industry. The primary source of revenue is advertising over the network platform. The company also owns SweetJack, a daily deals website that serves around 200 U.S. markets, somewhat similar to Groupon (NASDAQ:GRPN). Cumulus advertises SweetJack deals of the local merchants on its radio stations.
The radio industry is changing with the rise of digital platforms like Pandora (NYSE:P), Spotify, iTunes radio (NASDAQ:AAPL), iheartradio, Sirius XM radio (NASDAQ:SIRI) and Rdio among others. Offerings from these providers range from On-demand model to "curated" play-lists catering to national and local markets.
Growing and expected to sustain growth
Radio broadcasting has been on a secular decline trend with the market shrinking at almost 2.5% annually (IBIS reports) but Cumulus has been able to beat the trend with actively managing its portfolio of assets.
Yearly growth rates
This trend of growth is expected to stay with the company guiding for full year revenues to grow 0-1% and up 2% (ex-political). 42 out of 60 categories track by the management have shown positive growth in the last quarter. For the fourth quarter, revenues are expected to grow 4% (ex-political).
Management's optimism is clear from Lewis Dickey, CEO, comments about the recent growth shown by the radio market in the most recent conference call
"I would say that radio advertising is -- radio in general is, I think, starting to experience a little bit of a renaissance as -- we're starting to see a much greater buzz for the medium for audio advertising in general. The space seems to be expanding. And people are realizing the value of audio advertising and how efficiently they can do it on a mass market basis with great target ability on -- using local broadcast radio."
Radio may be a matured industry but active management of its portfolio can help Cumulus beat the trend.
1. Strategic business initiatives that can help re-rate the franchise
Recently, there have been numerous initiatives that can add substantial strategic value. These developments, besides the radio station acquisitions of the last few years, can set up the franchise and stock for a complete re-rating by the investors.
Growth initiatives are going well
Earlier this year, the company invested $25 million in 4 growth initiatives - CBS Sports, NASH, Right Now Traffic and SweetJack. All four are exceeding expectations and should be profitable. These 4 initiatives are expected to continue to be productive growth drivers for the company.
CBS sports radio, produced by CBS Corp. (NYSE:CBS) and distributed by Cumulus, is exceeding 2013 plans and the company has a very strong start in the "up fronts" for 2014. It's affiliated in around 230 radio stations.
NASH, country related New York radio station bought by the company in January, is the second most listened-to country station in U.S. Besides a national rollout in 2014 for radio, Cumulus is planning to have a video strategy that is expected to roll out by second-half 2014 and a NASH magazine in the first half 2014. Leveraging the brand, the company is planning to do platform deals with advertisers for web, video, radio, digital audio, online and events.
Right Now Traffic is taking share in the traffic market and is expected to contribute to the growth in 2014.
SweetJack, the daily deal site, is benefiting from the joint marketing initiatives with Cumulus and Clear Channel radio stations. SweetJack's has been successfully integrated into the company's core media operations with an eye on national level advertisers. SweetJack is also ramping up on mobile activations while reducing the call center operations.
Dial Global deal - a good example of value creation
Cumulus, earlier this year, acquired Dial Global for $260 million and sold Townsquare Media for $238 million.
(click to enlarge)Source: Cumulus Media
The financial benefit of the Dial Global deal for Cumulus, which offers a good example of financial engineering combining with strategic insight to offer value creation opportunities for the shareholders, was
- $150 million of incremental revenue
- $30 million of incremental adjusted EBITDA
- Reduction in cumulative leverage x EBITDA from 7x to 6.5x
Besides the financial benefits, Dial Global, which is a leading producer of audio content, can help Cumulus' efforts in expanding content creation and original programming.
Rdio deal - helping step on the digital platform
In September, Cumulus announced a content, promotion and advertising partnership with Pulser Media - parent of Rdio digital music service. Cumulus for an equity stake in Pulser Media will provide exclusive content, media and on-air promotional commitments for a five-year period. Rdio will also use the Cumulus sales infrastructure for its upcoming ad-supported free products.
Rdio, with the launch of free (ad supported) on-demand music, custom play-lists and exclusive content curated by Cumulus, will directly compete with Pandora (P) and Spotify. This space makes up almost 1/3 of the total audio consumption and Rdio already has close to 20 million registered users.
This deal along with the Dial Global deal will help Cumulus create a solid content creation platform and expand its content into digital distribution while monetizing its sales infrastructure. This deal is not just expanding the available inventory but is also helping the company in penetrating digital markets, which can be another growth driver for the next year.
2. Financial engineering creating value for the shareholders
The company is highly levered with close to $2.6 billion of net debt but the company, over the last 1-2 years have been trying to create shareholder value via active management of its asset portfolio (e.g. Dial Global) and de-leveraging the balance sheet. The company is working towards getting below 5x leverage (debt/ EBITDA) from current levels of approximately 6.5x.
Since the Citadel deal 2 years ago, the company has paid down more than $420 million of debt and preferred. With almost 200 million of shares outstanding that equates to almost $2/ share of value creation for the shareholder. At current EBITDA levels of almost $375 million, this 1.5x de-leverage goal comes to $562 million or $2.8 per share of value to the shareholders.
De-leveraging efforts bearing fruits
Net long-term debt ($M)
Source: SEC filings
Both the debt and leverage ratio are moving in the right direction by reducing liability for the company.
Source: SEC filings
Book value is getting a boost from positive growth and smart balance sheet management.
Interest expense as % of revenue
Source: SEC filings
Interest expense is declining both in terms of absolute number and as percentage of revenue benefiting the bottom line. Besides debt repayments, borrowing costs have also come down due to active refinancing and expect this to continue.
Going forward, expect the company to monetize another $100 million or so from the sale of non-core assets mainly in land and towers. The company has close to 200 towers.
Valuation has value especially in light of de-leveraging efforts
The correct way to look at the numbers might be in light of improving trends on the free cash flow and EBITDA side rather than taking a purely static look, as shown in the worksheet below.
Market Cap ($B)
P/ Expected 2013 Earnings
P/ Expected 2014 Earnings
Rev growth FY 13
EV/ EBITDA TTM.
Rev growth FY 14
Debt/ Adj. EBITDA 2013
Source: Press releases and Y Finance
The company has generated $141 million of free cash flow through the year and expects to exceed $200 million for the full year 2013 with the further expectation to "materially exceed" $200 million of free cash flow for 2014.
The third quarter total revenue was up 2.1% and ex-political, the revenue growth was up 3.2% on the back of claimed market share gains in local markets and productivity improvements in the national sales team.
Momentum to stay strong
Guidance is for Q4 revenue between $278- 281 million, which is up 4% ex-political and down 2% total, and EBITDA $103-106 million. For the full year, revenues between $1081-84 million, which is up 0-1% total and up 2% ex-political, and EBITDA between $374-377 million.
The company expects not just revenue growth for the second half of the year but also strong 2014 due to decent political advertising wins again and other initiatives discussed earlier.
Cumulus Media is slowly transitioning from a radio station owner into a media company having a balance sheet strong enough to withstand competition and monetizing opportunities via productivity improvements on the way. Free cash flow of close to $1, which is to be used for de-leveraging, and revenue growth with strong operating margins can create decent value for shareholders. Target is $9.