How Will Arbitron Fare in This Market?

Oct.15.08 | About: Arbitron, Inc. (ARB)

It is hard to believe that after all the credit-crisis and market meltdown, still there are a few stocks flying high. Arbitron (NYSE:ARB) is a radio audience metrics firm, whose valuation is very high even in normal market conditions. It provides audience measurements to more than 4000 radio stations and 2000 ad agencies. It popped up on my radar while I was glancing through high fliers. Arbitron has PE of 33 and trades at whopping 93 times its book value.

Arbitron has trailing a twelve-month revenue of $340 Million and has a market cap of $1 Billion dollars. Recent quarter balance sheet and income statements look much more unstable. Arbitron's current ratio is at 0.6, which means short term liabilities within a year are twice more than its current assets including cash and account receivables. Pay close attention to the return on equity portion, total assets appear at $172 million and liabilities at $160 makes $12 million and ROE appears at 60 percent. Other end total assets portion has $39 million goodwill and $1 million intangibles; if you ignore the goodwill portion this company has $27 million negative equity. Now can you measure the ROE and long-term debt to equity?

Arbitron has a very good dividend policy, i.e. $0.40 per year makes one percent yield or 40 percent of the payout ratio. As of last quarter, Arbitron has $50 million long-term debt and net interest payment is more than net income after taxes. With earnings in decline (last quarter EPS was $0.02) and market conditions getting worse, how can the company sustain its dividend policy? If the dividend is sacked, what will be the investors' reaction? Going forward with this adverse economic conditions, negative equity and excessive unhealthy debt with indigestible high valuations, I seriously doubt the sustainability of the current valuation of this equity.

Stock position: Short ARB.