Entravision: Solid Upside On Triumvirate Of 2014 Catalysts

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Entering the next eighteen months, Entravision Communications (NYSE:EVC) is an interesting small-cap name that is entering a very strong cyclical growth period marked by political revenue (mid-term elections and Affordable Care Act) and World Cup 2014 in Brazil. Both of these events will create strong growth potential. In the article, we will look at these growth catalysts and what they mean for the company, but the even more important question for investors should be can growth be sustained or will the end of the 2014 cycle hit investors. As we see it, the 2014 growth cycle gives 30% upside at least. The long-term sustainability of growth is not offering significant extra value, so we see the holding as a solid twelve month name, but beyond that, upside may be limited.

In the article, we will quantify these growth initiatives for investors and discuss how much value they have. From there, we will discuss how these initiatives can create long-term success for the company. Thirdly, we will discuss the company's valuations and lay out the "bear case." Finally, we will run the numbers through a basic DCF analysis to show investors how these growth levels can be priced.

Catalysts

The most important aspect of Entravision's business is their TV business, which accounts for nearly 75% of revenue. So, to understand major catalysts for the stock, looking at television revenue is crucial. We have identified three major catalysts for TV over the next eighteen months that will provide a major growth cycle for EVC: mid-term elections, Affordable Health Care Act, and World Cup 2014.

As we know, Entravision is a Latino community broadcast company with TV, radio, and digital broadcasting. The company, therefore, is very interesting for the next round of mid-term elections. Latino voters are becoming very important for politicians. In 2012, there were 24M Latino eligible voters. In 2000, there were 13.2M. No other sector of the voting population is seeing that type of growth. Both parties have identified the Latino community as crucial to their future. The two main issues for the Latino communities, among others, is immigration reform and healthcare. Heading into 2014, these two issues will be very important to mid-term elections.

According to Latino Decisions, 44 GOP-held House seats will come under heavy Latino voter influence. Only seventeen seats are needed for Democrats to take the majority in the House. Of those 44, fourteen are in heavily populated Latino areas and narrow margins of victory in 2012. In these areas, Latinos are expected to basically determine the winner. In ten areas, Latinos are expected to have a strong influence, and another twenty they could be a factor. What that means is that Latinos will be in the crosshairs of political ad spending in a number of key areas. Here is a list of the major battleground areas:

How do these match up with EVC's business?

Entravision has TV or radio in 20/44 with several more periphery markets. That means that we believe EVC can power some very strong political revenue. We have created a map that overlays the key voting districts with TV and radio coverage so you can understand just how powerful these markets will be in the 2014 political season:

Latino voters are as a percentage much higher Democrat voters. According to the Washington Post, 70% of Latino voters are Democratic. 22% are Republican. With key Latino voting populations growing and the non-white vote becoming increasingly important, it is imperative that Republicans begin to appeal to Latino voters. Latino vote appears to be mixed on strategy for individual Republicans, but getting their vote in these areas is a must. Republicans need to communicate effectively to Latino voters about immigration reform, economic opportunity, and why they are against Obamacare when 50% of uninsured in California and Texas are Latino.

As RNC Chair Reince Priebus noted, "The nation's demographic changes add to the urgency of recognizing how precarious our position has become…. Unless the RNC gets serious about tackling this problem, we will lose future elections; the data demonstrates this."

What does all this mean for Entravision?

The company saw $7.1M in political ad revenue in 2010, and it saw $16.6M in revenue in 2012. The company has not noted exactly how much money will be spent in 2014, but the company believes it will be much more than 2010. Expecting $10-$12M in revenue from political ads in 2014 could easily occur. Political revenue is going to be very positive for EVC in 2014 and will provide a solid catalyst for the company in the next 18 months. In our DCF section, we will use these figures to understand just how this catalyst translates into share price.

Another major catalyst that can be powerful as well is the Affordable Care Act. The cycle for advertising revenue for the Act will be Q3 2013 - Q2 2014. On October 1, 2013, ACA signups will begin. Up to that date and throughout the next several months, a large amount of education about the topic will occur. For EVC, the company expects to see ad revenue coming in from TV, digital, and radio. They have estimated that ACA can bring $3M-$5M in ad revenue.

Further, since 50% of uninsured voters in California and Texas are Latino, the education and money will be directed at these channels. This is another advantage that EVC has over its competitors and can provide solid revenue prospects for the company.

Finally, a third major catalyst for the next eighteen months is the World Cup 2014. The World Cup will take place in Brazil, which will attract a higher Latino population of viewership, and with the economy on better terms, the company can make even more money than in 2010. In that year, the company made $7.4M in advertising revenue. Yet, the company has already noted that advertising was at lower levels with automotive and retail spending very little on advertising revenue.

Now, automotive is the #1 advertising market for EVC. The company saw 29% growth year/year in the latest quarter, and the company believes that this market will continue to grow through 2014. The company has seen growth in nearly all advertising categories with the most growth in media, retail, and groceries along with automotive. All areas grew by over 20%. Companies like Wal-Mart (NYSE:WMT), Jaguar, and Payless were key contributors. The company's continued success in TV even in a cyclically weak year without political revenue is definitely a strong support for future growth. With advertising channels continuing to operate at stronger levels for EVC, we can expect significantly stronger revenue gain for the company over 2010 numbers. In fact, the company is getting so much excitement about the World Cup that they have promoted a new EVP for Integrated Marketing Solutions that will focus mostly on the World Cup and healthcare cycle.

Here is what EVC will be able to feature through their Univision transmission:

- All USA and Mexico qualifiers for the World Cup (29 games)

- French, German, and Italy national qualifying games (33 games)

- All games for FIFA World Cup 2014

The viewership of the "Road to the World Cup" has already been very strong. The 2013 Confederations Cup, a tune-up for the World Cup, had very strong viewership. The Mexico vs. Italy match in June got 5.2M viewers, while average viewers for other matches were over 1.0M viewers.

We believe that the company can leverage this opportunity to make 10M-12M in revenue in 2014 as well. Sports are another great catalyst for the company in the next eighteen months that can create considerable potential upside.

The other major growth initiative for the company comes from its focus on digital media. The company saw digital media revenue grow 126% in the latest quarter, which outpaced the average in the industry of around 30%. The company's digital media includes websites, ad revenue from those websites, EntraLeads, radio streaming, and mobile. We will discuss these various initiatives, but digital revenue is still only a small portion of the company's business, and the growth of this area is where the company can add larger growth levels overall.

The company's goal has been to diversify revenue over acquire given their very specific client base. Therefore, the focus has been on digital initiatives to connect TV, radio, and digital media further. One growth initiative is EntraLeads. The company is a lead generation business that Entravision runs, which creates leads fro national and local advertisers based on customers. The program allows advertisers to get analytical data to measure their effectiveness and interaction with customers. The product appeals to advertisers to help them connect with the Latino community.

The company also is seeing digital growth from their websites for TV stations with 9000 stories published in the latest quarter as well as growth of viewership of videos that correspond with news channels. In the latest quarter, the company saw 4.6M hours streamed of their digital radio stations. The company actually has a very appealing digital streaming business. Right no, the company operates 48 stations that all have online streaming capabilities. The more exciting aspect of the company's radio business though is their affiliate business. They have 300 stations that use Entravision programming to fill out their business. As the Latino community continues to grow, the demand of this programming will continue to grow, and we believe that their affiliate program will continue to grow. Another exciting development is a recent business partnership with Abacast. The company will allow EVC to use Abacast's Clarity Digital Radio System to monetize online streaming radio with ad insertion. The company can market this to their affiliates as well and help them create money off of it for themselves as well as the company. Finally, the company has mobile advertising streams where they do text advertising to these leads through EntraLeads.

The discussion from here about Entravision needs to put these figures in the context of how they translate into stock valuations and current value.

DCF Analysis/Pricing

In the analysis, we will do two analyses. We will analyze the company for a price target based on 2014 growth as well as a five-year model through 2017.

For 2014, we have projected that revenue from the three major growth catalysts of political revenue, ACA, and World Cup 2014 at $10M-$12M, $3M-$5M, and $10M-$12M, respectively. In the trailing twelve months (TTM), without any politics or ACA and very little World Cup revenue, the company has made $228M with 6% growth in TV the latest quarter (beating 1% growth for the industry average). For 2013, we can estimate revenue will be at $235M, moving about 6% over 2012 with good advertising demand for all networks as well as the first part of the ACA cycle. In 2014, we expect flatter overall growth outside of the catalyst but adding in $10-$12M for politics and World Cup each gives us around $260M in revenue. These estimates are above other analysts who are estimating around $245M. We believe that the catalysts, therefore, are underestimated.

How does that convert to stock valuations?

With a net margin around 12% for 2014, the company can convert about $30M into net income. The company's TTM net margin is 8.4%, but the company has fixed costs mostly, so adding more revenue increases margins. $31M converts to EPS at 0.36, which converts to a future PE at 14.7. Analysts are estimating a much larger growth of net margins to around 16-18%. We are not sure about that kind of growth, but if we take that level as a best-case scenario, the company should convert an EPS at roughly 0.50, which converts to a future PE at 11.

There is definitely some value in shares especially since the company is the best growth name in the broadcast industry. Yet, at the same time, some of the upside from 2014 catalysts has started to price into shares. If the company can move to its current PE around 20, we should expect 25% - 50% growth with a lot dependent on the net margin conversion. That number is enticing to us.

For an investor looking further out, we are interested in a five-year DCF analysis.

Operating income: Expecting $70M in 2013 then $85M in 2014, we expect a slowdown again in 2015 as the company loses political revenue and World Cup. Roughly $77M can be expected. 2016 will be a giant year with election years. With $16.6M in revenue coming in at the last election season, the company should see around $20M added in 2016 as the Latino vote continues to play out. Finally, we would expect another move back again in 2017. Another concern is that Univision lost the rights to the World Cup in 2018, so that will not come back in that year.

Tax Rate: 26-28% expected rate.

Depreciation: This number has been steadily declining for the past five years. This has occurred because the company has had mostly fixed assets with increasing capital expenditures. We would expect these levels to stay pretty flat, but they could jump on an acquisition (although the company has signaled they are not interested in any).

Capital Expenditures: We would expect these to rise as the company's leverage has come down and should use cash to add assets, increase share buybacks, or add a dividend.

Step 1.

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

70

85

77

88

82

Taxes

20

24

22

25

23

Depreciation

16

18

20

22

25

Capital Expendit.

-12

-15

-20

-22

-24

Working Capital

-4

-4

-4

-4

-4

Available Cash Flow

58

68

59

67

64

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for EVC: 10.0%

2013

2014

2015

2016

2017

PV Factor of WACC

0.9091

0.8264

0.7513

0.6830

*

PV of Available Cash Flow

53

56

45

46

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for EVC: 6.0%

2017

Available Cash Flow

64

Divided by Cap Rate

6.0%

Residual Value

1067

Multiply by 20167PV Factor

0.6830

PV of Residual Value

729

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

200

PV of Residual Value

729

Cash/Cash Equivalents

341

Interest Bearing Debt

41

Equity Value

629

Step 5.

Divide equity value by shares outstanding:

Equity Value

629

Shares Outstanding

87.87

Price Target

$7

As we can see, the company has around 30-35% upside when we price the company out for five years as well. Five-year projections are a common way to understand pricing for 12-month movement, which puts us at about the same areas as the 2014 projections.

Valuations

Right now, EVC has a PE north of 20 while future PE around 10. The company is normally priced or a bit expensive in relation to the current year, but cheap in comparison to future growth. How do these levels compare to competition? The average PE for the industry of broadcast TV is just south of 6.0. CBS (NYSE:CBS) sits at 19. Sinclair Broadcasting (NASDAQ:SBGI) sits at 17, and CTCT Media (NASDAQ:CTCM), which is another growth name in broadcast TV as it does business in Russia, sits at just south of 20.0. As we can see, EVC is slightly more expensive than its competition and much more expensive than its industry. The question, therefore, for investors is whether or not this elevated price is still worth it or if most of the potential growth is priced into the stock. The company's TV potential is attractive, but we will determine if these attractive growth factors are enough to buy now.

Bear Case

There is a lot to like with EVC. Growing TV and diversified revenue along with a growth market in the domestic economy. Yet, we see some general issues with broadcast TV that keep our expectations in check overall. As we have noted in our previous articles:

Some issues that we see…are growth of internet viewership of TV with Netflix and Hulu, growth of video on demand, online internet news growth, switching for advertisers from broadcast TV to cable TV, and Aereo. As we noted in our SBGI article, one interesting statistic to show this trend is that since 2007 all local news has been on the decline. In 2007, 28M people watched late and 25M watched early evening news. Now, that number has dropped to just under 26M and just over 22M. Additionally, cable television has grown in popularity over the past five years with better content. Inventions like DVR threaten ad revenue for broadcast television. DVR, Hopper, and other devices allow individuals to record shows and then skip commercials. The long-term trajectory of broadcast TV's ability to negotiate strong ad revenue is definitely a concern.

The issues for broadcast TV are definitely going to play out more over the next several years, but we do not believe that for the Latino community that these issues are as strong as others. Further, the company is the best growth story for advertisers. While advertisers are worried about basic broadcast cable more and more, Latino advertising continues to grow. Ad spending, as a whole, is down in 2013, according to Ad Age. Yet, Hispanic TV has seen a double-digit growth of revenue dollars. The story for EVC is far from other broadcast companies, and that gives the company added value.

Conclusion

Entravision is a growth name in a low growth industry, which makes the stock attractive. The company has major catalysts for 2014, and we believe that those catalysts can provide 25% upside from current levels over the next twelve months at least. In the best case, we could see 50% upside. Risk of downside seems limited as well with so many catalysts working in EVC's favor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.